New Venture Creation Chap 16-19

Management

McGraw−Hill Primis

ISBN: 0−390−52229−5

Text: New Venture Creation: Entrepreneurship for the 21st Century, 6/eTimmons et al.

New Ventures 1BUSAD 511

Instructor:Chuck Thomas

Penn State Great ValleyNew Ventures

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Management

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Management

Contents

Timmons et al. • New Venture Creation: Entrepreneurship for the 21st Century, 6/e

V. Startup and After 1

17. Managing Rapid Growth: Entrepreneurship Beyond Startup 118. The Entrepreneur and the Troubled Company 1519. The Harvest and Beyond 2620. Crafting a Personal Entrepreneurial Strategy 36

iii

Timmons et al.: New Venture Creation: Entrepreneurship for the 21st Century, 6/e

V. Startup and After 17. Managing Rapid Growth: Entrepreneurship Beyond Startup

1© The McGraw−Hill Companies, 2004

Inventing New Organizational Paradigms

At the beginning of this text we chronicled the demiseof brontosaurus capitalism. The nimble and fleet-footed entrepreneurial firms have supplanted the ag-ing giants with new leadership approaches, a passionfor value creation, and an obsession with opportunitythat have been unbeatable in the marketplace for tal-ent and ideas. These entrepreneurial ventures haveexperienced rapid to explosive growth and have be-come the investments of choice of the U.S. venturecapital community.

Because of their innovative nature and competi-tive breakthroughs, entrepreneurial ventures havedemonstrated a remarkable capacity to invent newparadigms of organization and management. Theyhave abandoned the organizational practices andstructures typical of the industrial giants from thepost-World War II era to the 1990s. One couldcharacterize those brontosaurus approaches thus:What they lacked in creativity and flexibility to dealwith ambiguity and rapid change, they made up forwith rules, structure, hierarchy, and quantitativeanalysis.

17Chapter Seventeen

Managing Rapid Growth:Entrepreneurship Beyond Startup“Bite off more than you can chew, and then chew it!”

Roger BabsonFounder, Babson College

Results ExpectedUpon completion of the chapter, you will have:1. Examined how higher potential, rapidly growing ventures have invented new

organizational paradigms to replace brontosaurus capitalism.2. Studied how higher potential ventures “grow up big” and the special problems,

organization, and leadership requirements of rapid growth.3. Examined new research on the leading management practices that distinguish high

growth companies.4. Explored concepts of organizational culture and climate, and how entrepreneurial

leaders foster favorable cultures.5. Identified specific signals and clues that can alert entrepreneurial managers to

impeding crises and approaches to solve these.6. Analyzed the “Quick Lube Franchise Corporation” case study.

559

Special thanks to Ed Marram, entrepreneur, educator, and friend, for his lifelong commitment to studying and leading growing businesses and sharing his knowledgewith the authors.



2 © The McGraw−Hill Companies, 2004

560 Part V Startup and After

The epitome of this pattern is the Hay System,which by the 1980s became the leading method ofdefining and grading management jobs in large com-panies. Scoring high with “Hay points” was the key tomore pay, a higher position in the hierarchy, andgreater power. The criteria for Hay points include:number of people who are direct reports, value of as-sets under management, sales volume, number ofproducts, square feet of facilities, total size of one’soperating and capital budget, and the like. One caneasily see who gets ahead in such a system: Be bu-reaucratic, have the most people and largest budget,increase head count and levels under your control,and think up the largest capital projects. Missing inthe criteria are all the basic components of entrepre-neurship we have seen in this book: value creating,opportunity creating and seizing, frugality with re-sources, bootstrapping strategies, staged capital com-mitments, team building, achieving better fits, andjuggling paradoxes.

Contrast the multilayered, hierarchical, military-like levels of control and command that characterizebrontosaurus capitalism with the common patternsamong entrepreneurial firms: they are flat—oftenonly one or two layers deep—adaptive, and flexible;they look like interlocking circles rather than ladders;they are integrative around customers and criticalmissions; they are learning- and influence-basedrather than rank- and power-based. People lead morethrough influence and persuasion, which are derivedfrom knowledge and performance rather thanthrough formal rank, position, or seniority. They cre-ate a perpetual learning culture. They value peopleand share the wealth with people who help create it.

Entrepreneurial Leaders Are NotAdministrators or Managers

In the growing business, owner-entrepreneurs focus onrecognizing and choosing opportunities, allocatingresources, motivating employees, and maintainingcontrol—while encouraging the innovative actions thatcause a business to grow. In a new venture the entre-preneur’s immediate challenge is to learn how to dancewith elephants without being trampled to death! Oncebeyond the start-up phase, the ultimate challenge of theowner/manager is to develop the firm to the pointwhere it is able to lead the elephants on the dance floor.

Consider the following quotes from two distin-guished business leaders, based on their experienceswith holders of MBAs in the 1960s–80s. Fred Smith,founder, chairman, and CEO of Federal Express

“MBAs are people in Fortune 500 companies whomake careers out of saying no!”

Accoridng to General George Doriot, father ofAmerican venture capital and for years a professor atHarvard Business School, “There isn’t any businessthat a Harvard MBA cannot analyze out of existence!”

Those are profound statements, given the sources.These perceptions also help to explain the stagnancyand eventual demise of brontosaurus capitalism. Le-gions of MBAs in the 1950s, 60s, 70s, and early 1980swere taught the brontosaurus model of management.Until the 1980s, virtually all the cases, problems, andlectures in MBA programs were about large, estab-lished companies.

Breakthrough Strategy: Babson’s F. W.Olin Graduate School

The first MBA program in the world to break thelockstep of the prior 50 years was the Franklin W.Olin Graduate School of Business at Babson College.In 1992, practicing what they taught, faculty mem-bers discarded the traditional, functional approach toan MBA education, consisting of individual courses inaccounting, marketing, finance, information technol-ogy, operations, and human resources in stand-alonesequence, with too many lectures.

A revolutionary curriculum for the first year of theMBA took its place: An entirely new and team-taughtcurriculum in a series of highly integrative modulesanchored conceptually in the model of the entrepre-neurial process from New Venture Creation.1 MBAsnow experience a unique learning curve that im-merses them for the first year in cases, assignments,and content that has immediate and relevant applica-bility to the entrepreneurial process. Emerging entre-preneurial companies are the focal points for mostcase studies, while larger, established companies seek-ing to recapture their entrepreneurial spirit and man-agement approach are examined in others. After morethan five years, students, employers, and faculty havecharacterized the program as a resounding success.(See the Babson College Web site: www.babson.edu.)

Leading Practices of High GrowthCompanies2

In Exhibit 2.11, we examined a summary of researchconducted on fast growth companies to determinethe leading practices of these firms. Now, this re-

1 See William Glavin, The President’s Report—1996 (Babson Park, MA: 1996). Babson College.2 Special appreciation is given to Ernst & Young LLP and The Kauffman Center for Entrepreneurial Leadership for permission to include the summary of their

research here.




Chapter 17 Managing Rapid Growth: Entreprenuership Beyond Startup 561

search will likely take on new meaning to the reader.As one examines each of these four practice areas—marketing, financial, management, and planning—one can see the practical side of how fast growth en-trepreneurs pursue opportunities; devise, manage,and orchestrate their financial strategies; build a teamwith collaborative decision making; and plan with vi-sion, clarity, and flexibility. Clearly, rapid growth is adifferent game, requiring an entrepreneurial mind-set and skills.

Growing Up Big

Stages of Growth Revisited

Higher potential ventures do not stay small very long.While an entrepreneur may have done a good job ofassessing an opportunity, forming a new ventureteam, marshaling resources, planning, and so forth,managing and growing such a venture is, a differentmanagerial game.

Ventures in the high growth stage face the prob-lems discussed in Chapter 8. These include forcesthat limit the creativities of the founders and team;that cause confusion and resentment over roles, re-sponsibilities, and goals; that call for specializationand therefore erode collaboration; that require oper-ating mechanisms and controls; and more.

Recall also that managers of rapidly growing ven-tures are usually relatively inexperienced in launching anew venture and yet face situations where time and

change are compounded and where events are nonlin-ear and nonparametric. Usually, structures, procedures,and patterns are fluid, and decision making needs to fol-low counterintuitive and unconventional patterns.

Chapter 8 discussed the stages or phases compa-nies experience during their growth. Recall that thefirst three years before startup are called the research-and-development (R&D) stage; the first three years,the startup stage; years 4 through 10, the early-growthstage; the 10th year through the 15th or so, maturity;and after the 15th year, stability stage. These time es-timates are approximate and may vary somewhat.

Various models, and our previous discussion, de-picted the life cycle of a growing firm as a smooth curvewith rapidly ascending sales and profits and a levelingoff toward the peak and then dipping toward decline.

In truth, however, very few, if any, new and grow-ing firms experience such smooth and linear phases ofgrowth. If the actual growth curves of new companiesare plotted over their first 10 years, the curves willlook far more like the ups and downs of a roller-coaster ride than the smooth progressions usually de-picted. Over the life of a typical growing firm, thereare periods of jerks, bumps, hiccups, indigestion, andrenewal interspersed with periods of smooth sailing.Sometimes there is continual upward progressthrough all this, but with others, there are periodswhere the firms seem near collapse or at least in con-siderable peril. Ed Marram, an entrepreneur and ed-ucator for 20 years, characterizes the five stages of afirm as Wonder, Blunder, Thunder, Plunder, Asunder(see Exhibit 17.1). Wonder is the period that is filled

HardWork!

Creationof

Myths

Teach&

Share

orDestroy!

Successor'sHard Work

Death

Liquidation

Time

FailuresQuit

Growth

(1)WONDER

(2)BLUNDER

(3)THUNDER

(4)PLUNDER

ASUNDER orrenaissanceof WONDER

EXHIBIT 17.1

Growth Stages





with uncertainty about survival. Blunder is a growthstage when many firms stumble and fail. The Thun-der stage occurs when growth is robust and the en-trepreneur has built a solid management team. Cashflow is robust during Plunder, but in Asunder the firmneeds to renew or will decline.

Core Management Mode

As was noted earlier, changes in several critical vari-ables determine just how frantic or easy transitionsfrom one stage to the next will be. As a result, it is pos-sible to make some generalizations about the mainmanagement challenges and transitions that will beencountered as the company grows. The core man-agement mode is influenced by the number of em-ployees a firm has, which is in turn related to its dol-lar sales.3

Recall, as shown in Exhibit 8.3, that until salesreach approximately $5 million and employees num-ber about 25, the core management mode is one ofdoing. Between $5 million and $15 million in salesand 25 to 75 employees, the core management modeis managing. When sales exceed $10 million and em-ployees number over 75, the core management modeis managing managers. Obviously, these revenue andemployment figures are broad generalities. The num-ber of people is an indicator of the complexity of themanagement task, and suggests a new wall to bescaled, rather than a precise point. To illustrate justhow widely sales per employee can vary, considerExhibit 17.2. This report from 1992 illustrates a met-ric that applies today—established firms generate$125,000 to $175,000 in sales per employee, while the$691,700 in sales generated by Reebok (due to havingrelatively few employees because of a great deal ofsubcontracting of shoe manufacture) was nearly 35times larger than Sonesta International Hotels’$19,700. These numbers are boundaries, constantlymoving as a result of inflation and competitive dy-namics. Sales per employee (SPE) can illustrate howa company stacks up in its industry, but rememberthat the number is a relative measurement. In 2001Siebel Systems’ SPE was $560,532, while Sun Mi-crosystems’ SPE was $493,098. IT provider GTSI hadan SPE of $1,300,871 and NVIDIA’s SPE was$1,875,673.4 Explosive sales per employee was one ofthe failed promises of the Internet, and to some ex-tent the irrational dot.com valuations of the late 1990swere an anticipation of technology massively leverag-ing variable employee expense.

The central issue facing entrepreneurs in all sortsof businesses is this: As the size of the firm increases,the core management mode likewise changes fromdoing to managing to managing managers.

During each of the stages of growth of a firm, thereare entrepreneurial crises, or hurdles, that most firmswill confront. Exhibit 17.3 and the following discus-sion consider by stage some indications of crisis.5 Asthe exhibit shows, for each fundamental driving forceof entrepreneurship, a number of “signals” indicatecrises are imminent. While the list is long, these arenot the only indicators of crises—only the most com-mon. Each of these signals does not necessarily indi-cate that particular crises will happen to every com-pany at each stage, but when the signals are there,serious difficulties cannot be too far behind.

The Problem in Rate of Growth

Difficulties in recognizing crisis signals and devel-oping management approaches are compounded byrate of growth itself. The faster the rate of growth,the greater the potential for difficulty; this is be-cause of the various pressures, chaos, confusion,and loss of control. It is not an exaggeration to say

3 Harvey “Chet” Krentzman described this phenomenon to the authors many years ago. The principle still applies.4 Kim Cross, “Does Your Team Measure Up? Business 2.0 (www.business2.com), June 2001.5 The crises discussed here are the ones the authors consider particularly critical. Usually, failure to overcome even a few can imperil a venture at a given stage. There

are, however, many more, but a complete treatment of all of them is outside the scope of this book.

EXHIBIT 17.2

1992 Sales per Employee

Company (000)

Raytheon Company $141.8Digital Equipment Corporation 138.7Data General Corporation 159.5Stratus Computer, Inc. 185.5Wang Laboratories, Inc. 164.8Well Fleet Communications 226.9Lotus Development Corporation 204.6Gillette 167.6Biogen, Inc. 309.4Genetic Institute 158.1Picture Tel Corporation 199.2Augat, Inc. 92.7Ground Round Restaurants 23.4Sonesta International Hotels 19.7Mediplex Group, Inc. 40.8Neiman Marcus Group 170.0Stop & Shop Company 118.5Reebok International Ltd. 691.7

Source: Boston Globe, June 8, 1993, p. 60.





EXHIBIT 17.3

Crises and Symptoms

Pre-Startup (Years �3 to �1)

Entrepreneurs:Focus. Is the founder really an entrepreneur, bent on building a company, or an inventor, technical dilettante, or the like?Selling. Does the team have the necessary selling and closing skills to bring in the business and make the plan—on time?Management. Does the team have the necessary management skills and relevant experience, or is it overloaded in one or two areas(e.g., the financial or technical areas)?Ownership. Have the critical decisions about ownership and equity splits been resolved, and are the members committed to these?

Opportunity:Focus. Is the business really user-, customer-, and market-driven (by a need), or is it driven by an invention or a desire to create?Customers. Have customers been identified with specific names, addresses, and phone numbers, and have purchase levels beenestimated, or is the business still only at the concept stage?Supply. Are costs, margins, and lead times to acquire supplies, components, and key people known?Strategy. Is the entry plan a shotgun and cherry-picking strategy, or is it a rifle shot at a well-focused niche?

Resources:Resources. Have the required capital resources been identified?Cash. Are the founders already out of cash (OOC) and their own resources?Business plan. Is there a business plan, or is the team “hoofing it”?

Startup and Survival (Years 0–3)

Entrepreneurs:Leadership. Has a top leader been accepted, or are founders vying for the decision role or insisting on equality in all decisions?Goals. Do the founders share and have compatible goals and work styles, or are these starting to conflict and diverge once theenterprise is underway and pressures mount?Management. Are the founders anticipating and preparing for a shift from doing to managing and letting go—of decisions andcontrol—that will be required to make the plan on time?

Opportunity:Economics. Are the economic benefits and payback to the customer actually being achieved, and on time?Strategy. Is the company a one-product company with no encore in sight?Competition. Have previously unknown competitors or substitutes appeared in the marketplace?Distribution. Are there surprises and difficulties in actually achieving planned channels of distribution on time?

Resources:Cash. Is the company facing a cash crunch early as a result of not having a business plan (and a financial plan)? That is, is it facinga crunch because no one is asking: When will we run out of cash? Are the owners’ pocketbooks exhausted?Schedule. Is the company experiencing serious deviations from projections and time estimates in the business plan? Is the companyable to marshall resources according to plan and on time?

Early Growth (Years 4–10)

Entrepreneurs:Doing or managing. Are the founders still just doing, or are they managing for results by a plan? Have the founders begun todelegate and let go of critical decisions, or do they maintain veto power over all significant decisions?Focus. Is the mind-set of the founders operational only, or is there some serious strategic thinking going on as well?

Opportunity:Market. Are repeat sales and sales to new customers being achieved on time, according to plan, and because of interaction withcustomers, or are these coming from the engineering, R&D, or planning group? Is the company shifting to a marketing orientationwithout losing its killer instinct for closing sales?Competition. Are price and quality being blamed for loss of customers or for an inability to achieve targets in the sales plan, whilecustomer service is rarely mentioned?Economics. Are gross margins beginning to erode?

Resources:Financial control. Are accounting and information systems and control (purchasing orders, inventory, billing, collections, cost andprofit analysis, cash management, etc.) keeping pace with growth and being there when they are needed?Cash. Is the company always out of cash—or nearly OOC, and is no one asking when it will run out, or is sure why or what to doabout it?Contacts. Has the company developed the outside networks (directors, contacts, etc.) it needs to continue growth?

(Continued)





that these pressures and demands increase geomet-rically, rather than in a linear way (see discussion inChapter 8).

Growth rates affect all aspects of a business. Thus,as sales increase, as more people are hired, and as in-ventory increases, sales outpace manufacturing ca-pacity. Facilities are then increased, people aremoved between buildings, accounting systems andcontrols cannot keep up, and so on. The cash burnrate accelerates. As such acceleration continues,learning curves do the same. Worst of all, cash collec-tions lag behind, as shown in Exhibit 17.4.

Distinctive issues caused by rapid growth wereconsidered at seminars at Babson College with thefounders and presidents of rapidly growing companies—companies with sales of at least $1 million and grow-ing in excess of 30 percent per year.6 These foundersand presidents pointed to the following:

Opportunity overload. Rather than lackingenough sales or new market opportunities, aclassic concern in mature companies, thesefirms faced an abundance. Choosing fromamong these was a problem.

EXHIBIT 17.3 (conc luded)

Crises and Symptoms

Maturity (Years 10–15 plus)

Entrepreneurs:Goals. Are the partners in conflict over control, goals, or underlying ethics or values?Health. Are there signs that the founders’ marriages, health, or emotional stability are coming apart (i.e., are there extramaritalaffairs, drug and/or alcohol abuse, or fights and temper tantrums with partners or spouses)?Teamwork. Is there a sense of team building for a “greater purpose,” with the founders now managing managers, or is there conflictover control of the company and disintegration?

Opportunity:Economics/competition. Are the products and/or services that have gotten the company this far experiencing unforgiving economicsas a result of perishability, competitor blind sides, new technology, or off-shore competition, and is there a plan to respond?Product encore. Has a major new product introduction been a failure?Strategy. Has the company continued to cherry-pick in fast-growth markets, with a resulting lack of strategic definition (whichopportunities to say no to)?

Resources:Cash. Is the firm OOC again?Development/information. Has growth gotten out of control, with systems, training, and development of new managers failing tokeep pace?Financial control. Have systems continued to lag behind sales?

Harvest/Stability (Years 15–20 plus)

Entrepreneurs:Succession/ownership. Are there mechanisms in place to provide for management succession and the handling of very trickyownership issues (especially family)?Goals. Have the partners’ personal and financial goals and priorities begun to conflict and diverge? Are any of the founders simplybored or burned out, and are they seeking a change of view and activities?Entrepreneurial passion. Has there been an erosion of the passion for creating value through the recognition and pursuit ofopportunity, or are turf-building, acquiring status and power symbols, and gaining control favored?

Opportunity:Strategy. Is there a spirit of innovation and renewal in the firm (e.g., a goal that half the company’s sales come from products orservices less than five years old), or has lethargy set in?Economics. Have the core economics and durability of the opportunity eroded so far that profitability and return on investment arenearly as low as that for the Fortune 500?

Resources:Cash. Has OOC been solved by increasing bank debt and leverage because the founders do not want—or cannot agree—to give upequity?Accounting. Have accounting and legal issues, especially their relevance for wealth building and estate and tax planning, beenanticipated and addressed? Has a harvest concept been part of the long-range planning process?

6 These seminars were held at Babson College near Boston in 1985 and 1999. A good number of the firms represented had sales over $1 million, and many weregrowing at greater than 100 percent per year.





Abundance of capital. While most stable orestablished smaller or medium-size firms oftenhave difficulties obtaining equity and debtfinancing, most of the rapidly growing firmswere not constrained by this. The problem was,rather, how to evaluate investors as “partners”and the terms of the deals with which theywere presented.Misalignment of cash burn and collection rates.These firms all pointed to problems of cashburn rates racing ahead of collections. Theyfound that unless effective integratedaccounting, inventory, purchasing, shipping,and invoicing systems and controls are in place,this misalignment can lead to chaos andcollapse. One firm, for example, had tripled itssales in three years from $5 million to $16million. Suddenly, its president resigned,insisting that, with the systems that were inplace, the company would be able to grow to$100 million. However, the computer systemwas disastrously inadequate, whichcompounded other management weaknesses. Itwas impossible to generate any believablefinancial and accounting information for manymonths. Losses of more than $1 millionannually mounted, and the company’s lenderspanicked. To make matters worse, the auditorsfailed to stay on top of the situation until it wastoo late and were replaced. While the companyhas survived, it has had to restructure its

business and has shrunk to $6 million in sales,to pay off bank debt and to avoid bankruptcy.Fortunately, it is recovering.Decision making. Many of the firms succeededbecause they executed functional day-to-dayand week-to-week decisions, rather thanstrategizing. Strategy had to take a back seat.Many of the representatives of these firmsargued that in conditions of rapid growth,strategy was only about 10 percent of the story.Expanding facilities and space . . . and surprises.Expansion of space or facilities is a problem andone of the most disrupting events during theearly explosive growth of a company. Managersof many of these firms were not prepared forthe surprises, delays, organizational difficulties,and system interruptions that are spawned bysuch expansion.

Industry Turbulence

The problems just discussed are compounded by theamount of industry turbulence surrounding the ven-ture. Firms with higher growth rates are usually foundin industries that are also developing rapidly. In addi-tion, there are often many new entrants, both withcompeting products or services and with substitutes.

The effects are many. Often, prices fluctuate. Theturbulence in the semiconductor industry in the 1980sis a good example. From June 1984 to June 1985, the

Time (quarter)

0 1 2 3 4 5 6 7 8

Dol

lars

Spend rate

Orders

Collections

EXHIBIT 17.4

Spend-Rate/Orders/Collection Leads and Lags





price to original equipment manufacturers (OEMs)of 64K memory chips fell from $2.50 each to 50 cents.The price to OEMs of 256K chips fell from $15 to $3.The same devastating industry effect manifested inthe years 2000–2002 when cellular airtime pricingplunged by more than 50 percent. Imagine the dis-ruption this caused in marketing and sales projec-tions, in financial planning and cash forecasting, andthe like, for firms in these industries. Often, too, thereare rapid shifts in cost and experience curves. Theconsequences of missed steps in growing business areprofound. Consider the examples of Polaroid and Xe-rox shown in Exhibit 17.5.

The Importance of Culture and Organizational Climate

Six Dimensions

The organizational culture and climate, either of anew venture or of an existing firm, are critical in howwell the organization will deal with growth. Studies ofperformance in large businesses that used the con-cept of organizational climate (i.e., the perceptions ofpeople about the kind of place it is to work) have led

to two general conclusions.7 First, the climate of anorganization can have a significant impact on perfor-mance. Further, climate is created both by the expec-tations people bring to the organization and by thepractices and attitudes of the key managers.

The climate notion has relevance for new ven-tures, as well as for entrepreneurial efforts in largeorganizations. An entrepreneur’s style and priorities—particularly how he or she manages tasks and people—is well known by the people being managed and af-fects performance. Recall the entrepreneurial climatedescribed by Enrico of Pepsi, where the critical fac-tors included setting high performance standards bydeveloping short-run objectives that would not sacri-fice long-run results, providing responsive personalleadership, encouraging individual initiative, helpingothers to succeed, developing individual networks forsuccess, and so forth. Or listen to the tale of Gerald H.Langeler, the president of the systems group of Men-tor Graphics Corporation, who explained what “the vi-sion trap” was.8 Langeler described the vision of hiscompany’s entrepreneurial climate as simply to “BuildSomething People Will Buy.”9 The culture of MentorGraphics was definitely shaped by the founders’ stylesbecause “there were perhaps 15 of us at the time—wecould not only share information very quickly, we

74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

$34.94

$20.46

$8.01$2.62

DJIA 2001 = $10,000+DJIA 1974 = $853$60

$50

$40

$30

$20

$10

$0

EXHIBIT 17.5

How the Mighty Have Fallen

Source: The authors wish to thank Ed Marram for sharing this analysis.

7 See Jeffry A. Timmons, “The Entrepreneurial Team: Formation and Development,” a paper presented at the Academy of Management annual meeting, Boston,August 1973.

8 Gerald H. Langeler, “The Vision Trap,” Harvard Business Review, March–April 1992, reprint 92204.9 Ibid., p. 4.





could also create a sense of urgency and purpose with-out the help of an articulated vision.”10

Evidence suggests that superior teams function dif-ferently than inferior teams in their setting priorities,in resolving leadership issues, in what and how rolesare performed by team members, in attitudes towardlistening and participation, and in dealing with dis-agreements. Further, evidence suggests that specificapproaches to management can affect the climate of agrowing organization. For example, gains from themotivation, commitment, and teamwork, which areanchored in a consensus approach to management,while not immediately apparent, are striking later. Atthat time, there is swiftness and decisiveness in actionsand in follow-through, since the negotiating, compro-mising, and accepting of priorities are history. Also,new disagreements that emerge generally do not bringprogress to a halt because there is both high clarity andbroad acceptance of overall goals and underlying pri-orities. Without this consensus, each new problem ordisagreement often necessitates a time-consumingand painful confrontation and renegotiation simplybecause it was not done initially.

Organizational climate can be described along sixbasic dimensions:

Clarity. The degree of organizational clarityin terms of being well organized, concise, andefficient in the way that tasks, procedures,and assignments are made and accomplished.Standards. The degree to which managementexpects and puts pressure on employees forhigh standards and excellent performance.Commitment. The extent to which employeesfeel committed to the goals and objectives ofthe organization.Responsibility. The extent to which membersof the organization feel responsibility foraccomplishing their goals without beingconstantly monitored and second-guessed.Recognition. The extent to which employeesfeel they are recognized and rewarded(nonmonetarily) for a job well done, instead ofonly being punished for mistakes or errors.Esprit de corps. The extent to which employeesfeel a sense of cohesion and team spirit, ofworking well together.

Approaches to Management

In achieving the entrepreneurial culture and climatedescribed above, certain approaches to management(also discussed in Chapter 8) are common across coremanagement modes.

Leadership No single leadership pattern seemsto characterize successful ventures. Leadership maybe shared, or informal, or a natural leader may guidea task. What is common, however, is a manager whodefines and gains agreements on who has what re-sponsibility and authority and who does what withand to whom. Roles, tasks, responsibilities, account-abilities, and appropriate approvals are defined.

There is no competition for leadership in these or-ganizations, and leadership is based on expertise, notauthority. Emphasis is placed on performing task-oriented roles, but someone invariably provides for“maintenance” and group cohesion by good humorand wit. Further, the leader does not force his or herown solution on the team or exclude the involvementof potential resources. Instead, the leader under-stands the relationships among tasks and between theleader and his or her followers and is able to lead inthose situations where it is appropriate, includingmanaging actively the activities of others through di-rections, suggestions, and so forth.

This approach is in direct contrast to the communeapproach, where two to four entrepreneurs, usuallyfriends or work acquaintances, leave unansweredsuch questions as who is in charge, who makes the fi-nal decisions, and how real differences of opinion areresolved. While some overlapping of roles and a shar-ing in and negotiating of decisions are desirable in anew venture, too much looseness is debilitating.

This approach also contrasts with situations wherea self-appointed leader takes over, where there iscompetition for leadership, or where one task takesprecedence over other tasks.

Consensus Building Leaders of most successfulnew ventures define authority and responsibility in away that builds motivation and commitment to cross-departmental and corporate goals. Using a consensusapproach to management requires managing andworking with peers and with the subordinates of others(or with superiors) outside formal chains of commandand balancing multiple viewpoints and demands.

In the consensus approach, the manager is seen aswilling to relinquish his or her priorities and power inthe interests of an overall goal, and the appropriatepeople are included in setting cross-functional orcross-departmental goals and in making decisions.Participation and listening are emphasized.

In addition, the most effective managers are com-mitted to dealing with problems and working prob-lems through to agreement by seeking a reconciliationof viewpoints, rather than emphasizing differences,and by blending ideas, rather than playing the role ofhard-nose negotiator or devil’s advocate to force their

10 Ibid., p. 5.





own solution. There is open confrontation of differ-ences of opinion and a willingness to talk out differ-ences, assumptions, reasons, and inferences. Logicand reason tend to prevail, and there is a willingnessto change opinions based on consensus.

Communication The most effective managersshare information and are willing to alter individualviews. Listening and participation are facilitated bysuch methods as circular seating arrangements, fewinterruptions or side conversations, and calm discus-sion versus many interruptions, loud or separate con-versations, and so forth, in meetings.

Encouragement Successful managers build con-fidence by encouraging innovation and calculatedrisk-taking, rather than by punishing or criticizingwhat is less than perfect, and by expecting and en-couraging others to find and correct their own errorsand to solve their own problems. Their peers and oth-ers perceive them as accessible and willing to helpwhen needed, and they provide the necessary re-sources to enable others to do the job. When it is ap-propriate, they go to bat for their peers and subordi-nates, even when they know they cannot always win.Further, differences are recognized and performanceis rewarded.

Trust The most effective managers are perceivedas trustworthy and straightforward. They do whatthey say they are going to do; they are not the corpo-rate rumor carriers; they are more open and sponta-neous, rather than guarded and cautious with eachword; and they are perceived as being honest and di-rect. They have a reputation of getting results and be-come known as the creative problem solvers whohave a knack for blending and balancing multipleviews and demands.

Development Effective managers have a reputa-tion for developing human capital (i.e., they groomand grow other effective managers by their exampleand their mentoring). As noted in Chapter 8, Brad-ford and Cohen distinguish between the heroic man-ager, whose need to be in control in many instancesactually may stifle cooperation, and the post-heroicmanager, a developer who actually brings about ex-cellence in organizations by developing entrepre-neurial middle management. If a company puts offdeveloping middle management until price competi-tion appears and its margins erode, the organizationmay come unraveled. Linking a plan to grow humancapital at the middle management and the supervi-sory levels with the business strategy is an essentialfirst step.

Entrepreneurial Management for the 21stCentury: Three Breakthroughs

Three extraordinary companies have been built orrevolutionized in the past two decades: Marion Labs,Inc., of Kansas City; Johnsonville Sausage of Cheboy-gan, Wisconsin; and Springfield RemanufacturingCorporation of Springfield, Missouri. Independentlyand unbeknown to each other, these companies cre-ated “high standard, perpetual learning cultures,”which create and foster a “chain of greatness.” Thelessons from these three great companies provide ablueprint for entrepreneurial management in the21st century. They set the standard and provide a tan-gible vision of what is possible. Not surprisingly, themost exciting, faster growing, and profitable compa-nies in America today have striking similarities tothese firms.

Ewing Marion Kauffman and Marion Labs

As described in Chapter 1, Marion Laboratories,founded in Ewing Marion Kauffman’s garage in 1950,had reached $2.5 billion in sales by the time itmerged with Merrill Dow in 1989. Its market capi-talization was $6.5 billion. Over 300 millionaires and13 foundations including the Ewing Marion Kauff-man Foundation, were created from the builders ofthe company. In sharp contrast, RJR Nabisco, about10 times larger than Marion Labs at the time of theKKR leveraged buyout, generated only 20 million-aires. Clearly, these were very different companies.Central to Marion Labs’ phenomenal success storywas the combination of a high potential opportunitywith management execution based on core valuesand management philosophy ahead of its time. Theseprinciples are simple enough, but difficult to incul-cate and sustain through good times and bad:

1. Treat everyone as you would want to betreated.

2. Share the wealth with those who havecreated it.

3. Pursue the highest standards of performanceand ethics.

As noted earlier, the company had no organiza-tional chart, referred to all its people as associates, notemployees, and had widespread profit-sharing andstock participation plans. Having worked for a fewyears now with Mr. K and the top management thatbuilt Marion Labs and then ran the foundation, theauthors can say that they are genuine and serious





about these principles. They also have fun while suc-ceeding, but they are highly dedicated to the practiceof these core philosophies and values.

Jack Stack and SpringfieldRemanufacturing Corporation

The truly remarkable sage of this revolution in man-agement is Jack Stack; his book, The Great Game ofBusiness, should be read by all entrepreneurs. In1983, Stack and a dozen colleagues acquired a tractorengine remanufacturing plant from the failing In-ternational Harvester Corporation. With an 89-to-1debt-to-equity ratio and 21 percent interest, they ac-quired the company for 10 cents a share. In 1993, thecompany’s shares were valued near $20 for the em-ployee stock ownership plan, and the company hadcompletely turned around with sales approaching$100 million. What had happened?

Like Ewing Marion Kauffman, Jack Stack createdand implemented some management approaches andvalues radically opposite to the top-down, hierarchi-cal, custodial management commonly found in largemanufacturing enterprises. At the heart of his leader-ship was creating a vision called The Big Picture:Think and act like owners, be the best we can be, andbe perpetual learners. Build teamwork as the key bylearning from each other, open the books to everyone,and educate everyone so they can become responsibleand accountable for the numbers, both short and longterm. Stack puts it this way:

We try to take ignorance out of the workplace and forcepeople to get involved, not with threats and intimidationbut with education. In the process, we are trying to closethe biggest gaps in American business—the gap be-tween workers and managers. We’re developing a sys-tem that allows everyone to get together and work to-ward the same goals. To do that, you have to knock downthe barriers that separate people, that keep people fromcoming together as a team.11

At Springfield Remanufacturing Corporation, every-one learns to read and interpret all the financial state-ments, including an income statement, balance sheet,and cash flow, and how his or her job affects each lineitem. This open-book management style is linked withpushing responsibility downward and outward, and tounderstanding both wealth creation (i.e., shareholdervalue) and wealth sharing through short-term bonusesand long-term equity participation. Stack describes the

value of this approach thus: “The payoff comes fromgetting the people who create the numbers to under-stand the numbers. When that happens, the communi-cation between the bottom and the top of the organiza-tion is just phenomenal.”12 The results he achieved in10 years are astounding. Even more amazing is that hehas found the time to share this approach with others.More than 150 companies have participated in semi-nars that have enabled them to adopt this approach.

Ralph Stayer and Johnsonville Sausage Company13

In 1975, Johnsonville Sausage was a small companywith about $5 million in sales and a fairly traditional,hierarchical, and somewhat custodial management.In just a few years, Ralph Stayer, the owner’s son, rad-ically transformed the company through a manage-ment revolution whose values, culture, and philoso-phy are remarkably similar to the principles of EwingMarion Kauffman and Jack Stack.

The results are astonishing: By 1980, the com-pany had reached $15 million in sales; by 1985, $50million; and by 1990, $150 million. At the heart ofthe changes he created was the concept of a totallearning culture: Everyone is a learner, seeking toimprove constantly, finding better ways. High per-formance standards accompanied by an investmentin training, and performance measures that made itpossible to reward fairly both short- and long-termresults were critical to the transition. Responsibilityand accountability was spread downward and out-ward. For example, instead of forwarding complaintletters to the marketing department, where they arefiled and the standard response is sent, they go di-rectly to the front-line sausage stuffer responsiblefor the product’s taste. The sausage stuffers are theones who respond to customer complaints now. An-other example is the interviewing, hiring, and train-ing process for new people. A newly hired womanpointed out numerous shortcomings with the exist-ing process and proposed ways to improve it. As a re-sult, the entire responsibility was shifted from thetraditional human resources/personnel group to thefront line, with superb results.

As one would guess, such radical changes do notcome easily. Consider Stayer’s insight:

In 1980, I began looking for a recipe for change. Istarted by searching for a book that would tell me how

11 Jack Stack, The Great Game of Business (New York: Currency/Doubleday Books, 1991), p. 5.12 Ibid., p. 93.13 For an excellent discussion of this transformation, see “The Johnsonville Sausage Company,” HBS Case 387-103, rev. June 27, 1990. Copyright © 1990 by the

President and Fellows of Harvard College. See also Ralph Stayer, “How I Learned to Let My Workers Lead,” Harvard Business Review, November–December1990. Copyright © 1990 by the President and Fellows of Harvard College.





to get people to care about their jobs and their com-pany. Not surprisingly, the search was fruitless. Noone could tell me how to wake up my own workforce;I would have to figure it out for myself . . . The mostimportant question any manager can ask is: “In thebest of all possible worlds what would I really want tohappen?”14

Even having taken such a giant step, Stayer was readyto take the next, equally perilous steps: Acting on in-stinct, I ordered a change. “From now on,” I an-nounced to my management team, “you’re all re-sponsible for making your own decisions” . . . I wentfrom authoritarian control to authoritarian abdica-tion. No one had asked for more responsibility; I hadforced it down their throats.15

Further insight into just how challenging it is totransform a company like Johnsonville Sausage is re-vealed in another Stayer quote:

I spent those two years pursuing another mirage of well-detailed strategic and tactical plans that would realizemy goals of Johnsonville as the world’s greatest sausagemaker. We tried to plan organizational structure two tothree years before it would be needed . . . Later I real-ized that these structural changes had to grow from day-to-day working realities; no one could dictate them fromabove, and certainly not in advance.16

Exhibit 17.6 summarizes the key steps in the trans-formation of Johnsonville Sausage over several years.Such a picture undoubtedly oversimplifies the processand understates the extraordinary commitment andeffort required to pull it off, but it does show how thecentral elements weave together.

The Chain of Greatness

As we reflect on these three great companies, wecan see that there is clearly a pattern here, withsome common denominators in both the ingredi-ents and the process. This chain of greatness be-comes reinforcing and perpetuating (see Exhibit17.7). Leadership that instills across the company avision of greatness and an owner’s mentality is acommon beginning. A philosophy of perpetuallearning throughout the organization accompaniedby high standards of performance is key to thevalue-creating entrepreneurial cultures at the threefirms. A culture that teaches and rewards team-work, improvement, and respect for each otherprovides the oil and glue to make things work. Fi-nally, a fair and generous short- and long-term re-ward system, as well as the necessary education to

EXHIBIT 17.6

Summary of the Johnsonville Sausage Company

The critical aspects of the transition:1. Started at the top: Ralph Stayer recognized that he was the heart of the problem and recognized the need to change—the most difficult

step.2. Vision was anchored in human resource management and in a particular idea of the company’s culture:

Continuous learning organization.Team concept—change players.New model of jobs (Ralph Stayer’s role and decision making).Performance- and results-based compensation and rewards.

3. Stayer decided to push responsibility and accountability downward to the front-line decision makers:Front-liners are closest to the customer and the problem.Define the whole task.Invest in training and selection.Job criteria and feedback � development tool.

4. Controls and mechanisms make it work:Measure performance, not behavior, activities, and the like.Emphasize learning and development, not allocation of blame.Customize to you and the company.Decentralize and minimize staff.

14 Stayer, “How I Learned to Let My Workers Lead,” p. 1.15 Ibid., pp. 3–4.16 Ibid., p. 4.





make sure that everyone knows and can use thenumbers, creates a mechanism for sharing thewealth with those who contributed to it. The resultsspeak for themselves: extraordinary levels of per-sonal, professional, and financial achievement.

Chapter Summary1. The demands of rapid growth have led to the

invention of new organizational paradigms byentrepreneurs.

2. The entrepreneurial organization today is flatter,faster, more flexible and responsive, and copesreadily with ambiguity and change. It is the oppositeof the hierarchy, layers of management, and themore-is-better syndrome prevalent in brontosauruscapitalism.

3. Entrepreneurs in high growth firms distinguishthemselves with leading entrepreneurial practices inmarketing, finance, management, and planning.

4. As high-potential firms “grow up big” theyexperience stages (Wonder, Blunder, Thunder,Plunder, Asunder or Wonder redux), each with itsown special challenges and crises, which arecompounded the faster the growth.

5. Establishing a culture and climate conducive toentrepreneurship is a core task for the venture.

6. A chain of greatness characterizes somebreakthrough approaches to leadership andmanagement in entrepreneurial ventures.

Study Questions1. Why have old hierarchical management paradigms

given way to new organizational paradigms?

LeadershipBig pictureThink/act like ownersBest we can be

VisionResults in

Achievement of personal and performance goalsShared pride and leadershipMutual respectThirst for new challenges and goals

Perpetual learning culture

Train and educateHigh performance goals/standardsShared learning/teach each otherGrow, improve, change, innovate

Widespreadresponsibility/accountability

Understand and interpret the numbersReward short-term with bonusesReward long-term with equity

Entrepreneurial mind-set and values

Take responsibilityGet resultsValue and wealth creationShare the wealth with those who create itCustomer and quality driven

and which

Leads toFosters

EXHIBIT 17.7

The Chain of Greatness





2. What special problems and crises can new venturesexpect as they grow? Why do these occur?

3. Explain the stages many ventures experience andwhy these are unique.

4. What role does the organizational culture andclimate play in a rapidly growing venture? Why aremany large companies unable to create anentreprenial culture?

5. What is the chain of greatness and why canentrpreneurs benefit from the concept?

6. Why is the rate of growth the central driver of theorganization challenges a growing venture faces?

MIND STRETCHERSHave You Considered?

1. Many large organizations are now attempting toreinvent themselves. What will be the biggestchallenge in this process, and why?

2. How fast should a company grow? How fast is toofast, organizationally and financially?

3. In your ideal world, how would you describe whatit is like to live and work within the perfectentrepreneurial organization?

4. Who should not be an entrepreneur?


V. Startup and After 18. The Entrepreneur and the Troubled Company


When the Bloom Is Off the Rose

This chapter is about the entrepreneur and thetroubled company. It traces the firm’s route intoand out of crisis and provides insight into how atroubled company can be rescued by a turnaroundspecialist.

Many times in the history of the United States,companies have experienced times of economic trou-bles. We are in such a period again in mid-2002. Bothcorporate and personal bankruptcies increased dur-

ing 2002, and managers needed a new and special setof skills to lead through the shoals.

There is a saying among horseback riders that theperson who has never been thrown from a horseprobably has never ridden one! Jim Hindman,founder of Jiffy Lube, is fond of saying, “Ultimately itis not how many touchdowns you score but how fastand often you get up after being tackled.” These in-sights capture the essence of the ups and downs thatcan occur during the growth and development of anew venture.

18Chapter Eighteen

The Entrepreneur and the Troubled Company“Yes, I did run out of time on a few occasions, but I never lost a ball game!”

Bobby Lanegreat quarterback in the 1950s and 1960s of the Detroit Lions and the Pittsburgh Steelers

“It’s OK to go bankrupt, but not on your last deal.”John W. Altman

entrepreneur and professor

Results ExpectedUpon completion of this chapter, you will have:1. Examined the principle causes and danger signals of impeding trouble.2. Discussed both quantitative and qualitative symptoms of trouble.3. Examined the principle diagnostic methods used to devise intervention and turnaround

plans.4. Identified remedial actions used for dealing with lenders, creditors, and employees.5. Analyzed the “EverNet Corporation” case study.

579

Special credit is due to Robert Bateman, Scott Douglas, and Ann Morgan for contributing material in this chapter. The material is the result of research andinterviews with turnaround specialists and was submitted in a paper as a requirement for the author’s Financing Entrepreneurial Ventures course in the MBAprogram at Babson College.

The authors are especially grateful to two specialists, Leslie B. Charm, who along with his partner has owned three national franchise companies, an entrepreneurialadvisory and troubled business management company, and a venture capital company, AIGIS Ventures, LLC; and Leland Goldberg of Coopers & Lybrand,Boston, who contributed enormously to the efforts of Bateman, Douglas, and Morgan and to the material.





Getting into Trouble—The Causes

Trouble can be caused by external forces not under thecontrol of management. Among the most frequentlymentioned are recession, interest rate changes, changesin government policy, inflation, the entry of new com-petition, and industry/product obsolescence.

However, those who manage turnarounds find thatwhile such circumstances define the environment towhich a troubled company needs to adjust, they arerarely the sole reason for a company failure. Externalshocks impact all companies in an industry, and onlysome of them fail. Others survive and prosper.

Most causes of failure can be found within com-pany management. Although there are many causesof trouble, the most frequently cited fall into threebroad areas: inattention to strategic issues, generalmanagement problems, and poor financial/account-ing systems and practices. There is striking similaritybetween these causes of trouble and the causes offailure for startups given in Chapter 2.

Strategic Issues

Misunderstood market niche. The first of theseissues is a failure to understand the company’smarket niche and to focus on growth withoutconsidering profitability. Instead of developinga strategy, these firms take on low-marginbusiness and add capacity in an effort to grow.They then run out of cash.Mismanaged relationships with suppliers andcustomers. Related to the issue of notunderstanding market niche is the failure tounderstand the economics of relationships withsuppliers and customers. For example, somefirms allow practices in the industry to dictatepayment terms, when they may be in a positionto dictate their own terms.Diversification into an unrelated business area.A common failing of cash-rich firms that sufferfrom the growth syndrome is diversificationinto unrelated business areas. These firms usethe cash flow generated in one business to startanother without good reason. As oneturnaround consultant said, “I couldn’t believeit. There was no synergy at all. They added totheir overhead but not to their contribution. Nocommon sense!”Mousetrap myopia. Related to the problem ofstarting a firm around an idea, rather than anopportunity, is the problem of firms that have“great products” and are looking for othermarkets where they can be sold. This is donewithout analyzing the firm’s opportunities.

The big project. The company gears up for a“big project” without looking at the cash flowimplications. Cash is expended by addingcapacity and hiring personnel. When sales donot materialize, or take longer than expected tomaterialize, there is trouble. Sometimes the“big project” is required by the nature of thebusiness opportunity. An example of this wouldbe the high-technology startup that needs tocapitalize on a first-mover advantage. Thecompany needs to prove the product’s “right tolife” and grow quickly to the point where it canachieve a public market or become an attractiveacquisition candidate for a larger company. Thisensures that a larger company cannot use itsadvantages in scale and existing distributionchannels, after copying the technology, toachieve dominance over the startup.Lack of contingency planning. As has beenstated over and over, the path to growth is not asmooth curve upward. Firms need to be gearedto think about what happens if things go sour,sales fall, or collections slow. There needs to beplans in place for layoffs and capacity reduction.

Management Issues

Lack of management skills, experience, andknow-how. As was mentioned in Chapter 8,while companies grow, managers need tochange their management mode from doing tomanaging to managing managers.Weak finance function. Often, in a new andemerging company, the finance function isnothing more than a bookkeeper. One companywas five years old, with $20 million in sales,before the founders hired a financialprofessional.Turnover in key management personnel.Although turnover of key managementpersonnel can be difficult in any firm, it is acritical concern in businesses that deal inspecialized or proprietary knowledge. Forexample, one firm lost a bookkeeper who wasthe only person who really understood whatwas happening in the business.Big-company influence in accounting. Amistake that some companies often make is tofocus on accruals, rather than cash.

Poor Planning, Financial/Accounting Systems, Practices, and Controls

Poor pricing, overextension of credit, andexcessive leverage. These causes of trouble are




Chapter 18 The Entrepreneur and the Troubled Company 581

not surprising and need not be elaborated.Some of the reasons for excess use of leverageare interesting. Use of excess leverage canresult from growth outstripping the company’sinternal financing capabilities. The companythen relies increasingly on short-term notesuntil a cash flow problem develops. Anotherreason a company becomes overleveraged is byusing guaranteed loans in place of equity foreither startup or expansion financing. Oneentrepreneur remarked, “[The guaranteedloan] looked just like equity when we started,but when trouble came it looked more andmore like debt.”Lack of cash budgets/projections. This is a mostfrequently cited cause of trouble. In smallcompanies, cash budgets/projections are oftennot done.Poor management reporting. While some firmshave good financial reporting, they suffer frompoor management reporting. As oneturnaround consultant stated, “[The financialstatement] just tells where the company hasbeen. It doesn’t help manage the business. Ifyou look at the important managementreports—inventory analysis, receivables aging,sales analysis—they’re usually late or notproduced at all. The same goes for billingprocedures. Lots of emerging companies don’tget their bills out on time.”Lack of standard costing. Poor managementreporting extends to issues of costing, too.Many emerging businesses have no standardcosts against which they can compare the actualcosts of manufacturing products. The result isthey have no variance reporting. The companycannot identify problems in process and takecorrective action. The company will know onlyafter the fact how profitable a product is.

Even when standard costs are used, it is not un-common to find that engineering, manufacturing,and accounting each has its own version of the billof material. The product is designed one way,manufactured a second way, and costed a third.Poorly understood cost behavior. Companiesoften do not understand the relationshipbetween fixed and variable costs. For example,one manufacturing company thought it wassaving money by closing on Saturday. In this way,management felt it would save paying overtime.It had to be pointed out to the lead entrepreneurby a turnaround consultant that, “He had a lot ofhigh-margin product in his manufacturingbacklog that more than justified the overtime.”

It is also important for entrepreneurs to under-stand the difference between theory and practice inthis area. The turnaround consultant mentionedabove said, “Accounting theory says that all costsare variable in the long run. In practice, almost allcosts are fixed. The only truly variable cost is a salescommission.”

Getting Out of Trouble

The major protection against and the biggest help ingetting out of these troubled waters is to have a set ofadvisors and directors who have been through this inthe past. They possess skills that aren’t taught inschool or in most corporate training programs. Anoutside “vision” is critical. The speed of action has tobe different; control systems have to be different; andorganization generally needs to be different.

Troubled companies face a situation similar to thatdescribed by Winston Churchill, in While EnglandSlept, “Descending inconstantly, fecklessly, the stair-way which leads to dark gulf. It is a fine broad stair-way at the beginning, but after a bit the carpet ends,a little farther on there are only flagstones, and a lit-tle farther on still these break beneath your feet.”

Although uncontrollable external factors such asnew government regulations do arise, an opportu-nity-driven firm’s crisis is usually the result of man-agement error. Yet in these management errors arefound part of the solution to the troubled company’sproblems. It is pleasing to see that many companies—even companies that are insolvent or have negativenet worth or both—can be rescued and restored toprofitability.

Predicting Trouble

Since crises develop over time and typically resultfrom an accumulation of fundamental errors, can acrisis be predicted? The obvious benefit of being ableto predict crisis is that the entrepreneur, employees,and significant outsiders, such as investors, lenders,trade creditors—and even customers—could seetrouble brewing in time to take corrective actions.

There have been several attempts to develop pre-dictive models. Two are presented below and havebeen selected because each is easy to calculate anduses information available in common financial re-ports. Because management reporting in emergingcompanies is often inadequate, the predictive modelneeds to use information available in common finan-cial reports.

Each of the two approaches below uses easily ob-tained financial data to predict the onset of crisis as





much as two years in advance. For the smaller publiccompany, these models can be used by all interestedobservers. With private companies, they are usefulonly to those privy to the information and are proba-bly only of benefit to such nonmanagement outsidersas lenders and boards of directors.

The most frequently used denominator in all theseratios is the figure for total assets. This figure often isdistorted by “creative accounting,” with expenses oc-casionally improperly capitalized and carried on thebalance sheet or by substantial differences betweentangible book value and book value (i.e., overvaluedor undervalued assets).

Net-Liquid-Balance-to-Total-Assets Ratio

The model shown in Exhibit 18.1 was developed byJoel Shulman, a Babson College professor, to predictloan defaults. Shulman found that his ratio can pre-dict loan defaults with significant reliability as muchas two years in advance.

Shulman’s approach is noteworthy because it ex-plicitly recognizes the importance of cash. Amongcurrent accounts, Shulman distinguishes between op-erating assets (such as inventory and accounts receiv-able) and financial assets (such as cash and mar-ketable securities). The same distinction is madeamong liabilities, where notes payable and contrac-tual obligations are financial liabilities and accountspayable are operating liabilities.

Shulman then subtracts financial liabilities from fi-nancial assets to obtain a figure known as the net liquidbalance (NLB). NLB can be thought of as “uncommit-ted cash,” cash the firm has available to meet contin-gencies. Because it is the short-term margin for errorshould sales change, collections slow, or interest rateschange, it is a true measure of liquidity. The NLB isthen divided by total assets to form the predictive ratio.

Nonquantitative Signals

In Chapter 17 we discussed patterns and actions thatcould lead to trouble, indications of common troubleby growth stage, and critical variables that can bemonitored.

Turnaround specialists also use some nonquantita-tive signals as indicators of the possibility of trouble.As with the signals discussed in Chapter 17, the pres-ence of a single one of these does not necessarily im-ply an immediate crisis. However, once any of thesesurfaces and if the others follow, then trouble is likelyto mount.

Inability to produce financial statements on time.Changes in behavior of the lead entrepreneur(such as avoiding phone calls or coming in laterthan usual).Change in management or advisors, such asdirectors, accountants, or other professionaladvisors.Accountant’s opinion that is qualified and notcertified.New competition.Launching of a “big project.”Lower research and development expenditures.Special write-offs of assets and/or addition of“new” liabilities.Reduction of credit line.

The Gestation Period of Crisis

Crisis rarely develops overnight. The time betweenthe initial cause of trouble and the point of interven-tion can run from 18 months to five years. What hap-pens to a company during the gestation period hasimplications for the later turnaround of the company.Thus, how management reacts to crisis and what hap-pens to morale determine what will need to happenin the intervention. Usually, a demoralized and un-productive organization develops when its membersthink only of survival, not turnaround, and its entre-preneur has lost credibility. Further, the company haslost valuable time.

In looking backward, the graph of a company’s keystatistics shows trouble. One can see the sales growthrate (and the gross margin) have slowed considerably.This is followed by an increasing rise in expenses asthe company assumes that growth will continue.

EXHIBIT 18.1

Net-Liquid-Balance-to-Total-Assets Ratio

Net-Liquid-Balance-to-Total Assets Ratio � NLB/Total Assets WhereNLB � (Cash � Marketable securities) � (Notes Payable � Contractual obligations)

Source: Joel Shulman, “Primary Rule for Detecting Bankruptcy: Watch the Cash,” Financial AnalystJournal, September 1988.





When the growth doesn’t continue, the company stillallows the growth rate of expenses to remain high soit can “get back on track.”

The Paradox of Optimism

In a typical scenario for a troubled company , the firstsigns of trouble (such as declining margins, customerreturns, or falling liquidity) go unnoticed or are writtenoff as teething problems of the new project or as the or-dinary vicissitudes of business. For example, one en-trepreneur saw increases in inventory and receivablesas a good sign, since sales were up and the current ra-tio had improved. However, although sales were up,margins were down, and he did not realize he had a liqui-dity problem until cash shortages developed.

Although management may miss the first signs,outsiders usually do not. Banks, board members, sup-pliers, and customers see trouble brewing. They won-der why management does not respond. Credibilitybegins to erode.

Soon management has to admit that trouble exists,but valuable time has been lost. Furthermore, requi-site actions to meet the situation are anathema. Thelead entrepreneur is emotionally committed to peo-ple, to projects, or to business areas. Further, to cutback in any of these areas goes against instinct, be-cause the company will need these resources whenthe good times return.

The company continues its downward fall, and thesituation becomes stressful. Turnaround specialistsmention that stress can cause avoidance on the part ofan entrepreneur. Others have likened the entrepre-neur in a troubled company to a deer caught in a car’sheadlights. The entrepreneur is frozen and can takeno action. Avoidance has a basis in human psychology.One organizational behavior consultant who hasworked on turnarounds said, “When a person understress does not understand the problem and does nothave the sense to deal with it, the person will tend toreplace the unpleasant reality with fantasy.” The con-sultant went on to say, “The outward manifestation ofthis fantasy is avoidance.” This consultant noted it iscommon for an entrepreneur to deal with pleasantand well-understood tasks, such as selling to cus-tomers, rather than dealing with the trouble. The re-sult is that credibility is lost with bankers, creditors,and so forth. (These are the very people whose coop-eration needs to be secured if the company is to beturned around.)

Often, the decisions the entrepreneur does makeduring this time are poor and accelerate the companyon its downward course. The accountant or the con-troller may be fired, resulting in a company that isthen flying blind. One entrepreneur, for example,running a company that manufactured a high-margin

product, announced across-the-board cuts in expen-ditures, including advertising, without stopping tothink that cutting advertising on such a product onlyadded to the cash flow problem.

Finally, the entrepreneur may make statementsthat are untrue or may make promises that cannot bekept. This is the death knell of his or her credibility.

The Bloom Is Off the Rose—Now What?

Generally, when an organization is in trouble sometelltale trends appear.

Ignore outside advice.The worse is still yet to come.People (including and usually, most especially,the entrepreneur) have stopped makingdecisions and also have stopped answering thephone.Nobody in authority has talked to theemployees.Rumors are flying.Inventory is out of balance.Accounts receivable aging is increasing.Customers are becoming afraid of newcommitments.A general malaise has settled in while a stillhigh-stressed environment exists (an unusualcombination).

Decline in Organizational Morale

Among those who notice trouble developing are theemployees. They deal with customer returns, callsfrom creditors, and the like, and they wonder whymanagement does not respond. They begin to loseconfidence in management.

Despite troubled times, the lead entrepreneur talksand behaves optimistically or hides in the office de-clining to communicate with either employees, cus-tomers, or vendors. Employees hear of trouble fromeach other and from other outsiders. They lose confi-dence in the formal communications of the company.The grapevine, which is always exaggerated, takes onincreased credibility. Company turnover starts to in-crease. Morale is eroding.

It is obvious there is a problem and that it is not be-ing dealt with. Employees wonder what will happen,whether they will be laid off, and whether the firmwill go into bankruptcy. With their security threat-ened, employees lapse into survival mode. As an or-ganizational behavior consultant explains:

The human organism can tolerate anything except un-certainty. It causes so much stress that people are no





longer capable of thinking in a cognitive, creative man-ner. They focus on survival. That’s why in turnaroundsyou see so much uncooperative, finger-pointing behav-ior. The only issue people understand is directing theblame elsewhere [or in doing nothing].

Crisis can force intervention. The occasion is usu-ally forced by the board of directors, lender, or a law-suit. For example, the bank may call a loan, or thefirm may be put on cash terms by its suppliers. Per-haps creditors try to put the firm into involuntarybankruptcy. Or something from the outside worldfundamentally changes the business environment.

The Threat of Bankruptcy1

Unfortunately the heads of most troubled companiesusually do not understand the benefits of bankruptcylaw. To them, bankruptcy carries the stigma of failure;however, the law merely defines the priority of cred-itors’ claims when the firm is liquidated.

Although bankruptcy can provide for the liquida-tion of the business, it also can provide for its reorga-nization. Bankruptcy is not an attractive prospect forcreditors because they stand to lose at least some oftheir money, so they often are willing to negotiate.The prospect of bankruptcy also can be a foundationfor bargaining in a turnaround.

Voluntary Bankruptcy

When bankruptcy is granted to a business underbankruptcy law (often referred to as Chapter 11), thefirm is given immediate protection from creditors.Payment of interest or principle is suspended, andcreditors must wait for their money. Generally thecurrent management (a debtor in possession) is al-lowed to run the company, but sometimes an out-sider, a trustee, is named to operate the company, andcreditor committees are formed to watch over the op-erations and to negotiate with the company.

The greatest benefit of Chapter 11 is that it buystime for the firm. The firm has 120 days to come upwith a reorganization plan and 60 days to obtain ac-ceptance of that plan by creditors. Under a reorgani-zation plan, debt can be extended. Debt also can berestructured (composed). Interest rates can be in-creased, and convertible provisions can be intro-duced to compensate debt holders for any increase intheir risk as a result of the restructuring. Occasionally,debt holders need to take part of their claim in the

form of equity. Trade creditors can be asked to takeequity as payment, and they occasionally need to ac-cept partial payment. If liquidation is the result of thereorganization plan, partial payment is the rule, withthe typical payment ranging from zero to 30 cents onthe dollar, depending on the priority of the claim.

Involuntary Bankruptcy

In involuntary bankruptcy, creditors force a troubledcompany into bankruptcy. Although this is regardedas a rare occurrence, it is important for an entrepre-neur to know the conditions under which creditorscan force a firm into bankruptcy.

A firm can be forced into bankruptcy by any threecreditors whose total claim exceeds the value of assetsheld as security by $5,000, and by any single creditorwho meets the above standard when the total numberof creditors is less than 12.

Bargaining Power

For creditors, having a firm go into bankruptcy is notparticularly attractive. Bankruptcy, therefore, is atremendous source of bargaining power for the trou-bled company. Bankruptcy is not attractive to credi-tors because once protection is granted to a firm,creditors must wait for their money. Further, they areno longer dealing with the troubled company but withthe judicial system, as well as with other creditors.Even if creditors are willing to wait for their money,they may not get full payment and may have to acceptpayment in some unattractive form. Last, the legaland administrative costs of bankruptcy, which can besubstantial, are paid before any payments are made tocreditors.

Faced with these prospects, many creditors con-clude that their interests are better served by negoti-ating with the firm. Because the law defines the pri-ority of creditors’ claims, an entrepreneur can use itto determine who might be willing to negotiate.

Since the trade debt has the lowest claim (exceptfor owners), these creditors are often the most willingto negotiate. The worse the situation, the more will-ing they may be. If the firm has negative net worthbut is generating some cash flow, the trade debt cred-itors should be willing to negotiate extended terms orpartial payment, or both, unless there is no trust incurrent management.

However, the secured creditors, with their higherpriority claims, may be less willing to negotiate. Many

1 As this edition goes to press, the U.S. Congress is deliberating a revision of the federal bankruptcy laws, which if enacted could have a profound impact on abusiness’s relationship with its lenders and creditors. Updates on bankruptcy laws, including additional Web links can be found athttp://www.swiggartagin.com/lawfind/.





factors affect the willingness of secured creditors to ne-gotiate. Two are the strength of their collateral and theirconfidence in management. Bankruptcy is still some-thing they wish to avoid for the reasons cited above.

Bankruptcy can free a firm from obligations underexecutory contracts. This has caused some firms tofile for bankruptcy as a way out of union contracts.Since bankruptcy law in this case conflicts with theNational Labor Relations Act, the law has been up-dated and a good-faith test has been added. The firmmust be able to demonstrate that a contract preventsit from carrying on its business. It is also possible forthe firm to initiate other executory contracts such asleases, executive contracts, and equipment leases. If acompany has gradually added to its overhead in anoneconomic fashion, it may be able to reduce itsoverhead significantly using bankruptcy as a tool.

Intervention

A company in trouble usually will want to use theservices of an outside advisor who specializes inturnarounds.

The situation the outside advisor usually finds atintervention is not encouraging. The company is of-ten technically insolvent or has negative net worth. Italready may have been put on a cash basis by its sup-pliers. It may be in default on loans, or if not, it isprobably in violation of loan covenants. Call provi-sions may be exercised. At this point, as the situationdeteriorates more, creditors may be trying to forcethe company into bankruptcy, and the organization isdemoralized.

The critical task is to quickly diagnose the situa-tion, develop an understanding of the company’s bar-gaining position with its many creditors, and producea detailed cash flow business plan for the turnaroundof the organization.To this end, a turnaround advisorusually quickly signals that change is coming. He orshe will elevate the finance function, putting the“cash person” (often the consultant himself) in chargeof the business. Some payments may be put on holduntil problems can be diagnosed and remedial actionsdecided upon.

Diagnosis

Diagnosis can be complicated by the mixture ofstrategic and financial errors. For example, for a com-pany with large receivables, questions need to be an-swered about whether receivables are bloated be-cause of poor credit policy or because the company isin a business where liberal credit terms are requiredto compete.

Diagnosis occurs in three areas: the appropriatestrategic posture of the business, the analysis of man-agement, and “the numbers.”

Strategic Analysis This analysis in a turn-around tries to identify the markets in which the com-pany is capable of competing and decide on a com-petitive strategy. With small companies, turnaroundexperts state that most strategic errors relate to the in-volvement of firms in unprofitable product lines, cus-tomers, and geographic areas. It is outside the scopeof this book to cover strategic analysis in detail. (Seethe many texts in the area.)

Analysis of Management Analysis of man-agement consists of interviewing members of themanagement team and coming to a subjective judg-ment of who belongs and who does not. Turnaroundconsultants can give no formula for how this is doneexcept that it is the result of judgment that comesfrom experience.

The Numbers Involved in “the numbers” is a de-tailed cash flow analysis, which will reveal areas forremedial action. The task is to identify and quantifythe profitable core of the business.

Determine available cash. The first task is todetermine how much cash the firm hasavailable in the near term. This is accomplishedby looking at bank balances, receivables (thosenot being used as security), and the confirmedorder backlog.Determine where money is going. This is amore complex task than it appears to be. Acommon technique is called subaccountanalysis, where every account that posts to cashis found and accounts are arranged indescending order of cash outlays. Accountsthen are scrutinized for patterns. Thesepatterns can indicate the functional areas whereproblems exist. For example, one company hadits corporate address on its bills, rather than thelockbox address at which checks wereprocessed, adding two days to its dollar daysoutstanding.Calculate percent-of-sales ratios for differentareas of a business and then analyze trends incosts. Typically, several of the trends will showflex points, where relative costs have changed.For example, for one company that hadundertaken a big project, an increase in cost ofsales, which coincided with an increase incapacity and in the advertising budget, wasnoticed. Further analysis revealed this projectwas not producing enough in dollar





contribution to justify its existence. Once theproject was eliminated, excess capacity couldbe reduced to lower the firm’s break-evenpoint.Reconstruct the business. After determiningwhere the cash is coming from and where it isgoing, the next step is to compare the businessas it should be to the business as it is. Thisinvolves reconstructing the business from theground up. For example, a cash budgetingexercise can be undertaken and collections,payments, and so forth determined for a givensales volume. Or the problem can beapproached by determining labor, materials,and other direct costs and the overheadrequired to drive a given sales volume. What isessentially a cash flow business plan is created.Determine differences. Finally, the cash flowbusiness plan is tied into pro forma balancesheets and income statements. The ideal cashflow plan and financial statements arecompared to the business’s current financialstatements. For example, the pro forma incomestatements can be compared to existingstatements to see where expenses can bereduced. The differences between theprojected and actual financial statements formthe basis of the turnaround plan and remedialactions.

The most commonly found areas for potentialcuts/improvements are these: (1) working capitalmanagement, from order processing and billing to re-ceivables, inventory control, and, of course, cashmanagement; (2) payroll; and (3) overcapacity andunderutilized assets. More than 80 percent of poten-tial reduction in expenses can usually be found inworkforce reduction.

The Turnaround Plan

The turnaround plan not only defines remedial ac-tions, but because it is a detailed set of projections, italso provides a means to monitor and control turn-around activity. Further, if the assumptions about unitsales volume, prices, collections, and negotiating suc-cess are varied, it can provide a means by whichworst-case scenarios—complete with contingencyplans—can be constructed.

Because short-term measures may not solve thecash crunch, a turnaround plan gives a firm enoughcredibility to buy time to put other remedial actionsin place. For example, one firm’s consultant could ap-proach its bank to buy time with the following: By re-ducing payroll and discounting receivables, we canimprove cash flow to the point where the firm can be

current in five months. If we are successful in negoti-ating extended terms with trade creditors, then thefirm can be current in three months. If the firm cansell some underutilized assets at 50 percent off, it canbecome current immediately.

The turnaround plan helps address organizationalissues. The plan replaces uncertainty with a clearlydefined set of actions and responsibilities. Since it sig-nals to the organization that action is being taken, ithelps get employees out of their survival mode. An ef-fective plan breaks tasks into the smallest achievableunit, so successful completion of these simple taskssoon follows and the organization begins to experi-ence success. Soon the downward spiral of organiza-tional morale is broken.

Finally, the turnaround plan is an important sourceof bargaining power. By identifying problems and pro-viding for remedial actions, the turnaround plan en-ables the firm’s advisors to approach creditors and tellthem in very detailed fashion how and when they willbe paid. If the turnaround plan proves that creditorsare better off working with the company as a going con-cern, rather than liquidating it, they will most likely bewilling to negotiate their claims and terms of payment.Payment schedules can then be worked out that cankeep the company afloat until the crisis is over.

Quick Cash Ideally, the turnaround plan estab-lishes enough creditor confidence to buy the turn-around consultant time to raise additional capital andturn underutilized assets into cash. It is imperative,however, to raise cash quickly. The result of the ac-tions described below should be an improvement incash flow. The solution is far from complete, however,because suppliers need to be satisfied.

For the purpose of quick cash, the working capitalaccounts hold the most promise.

Accounts receivable is the most liquid noncashasset. Receivables can be factored, but negotiatingsuch arrangements takes time. The best route tocash is discounting receivables. How much receiv-ables can be discounted depends on whether theyare securing a loan. For example, a typical bank willlend up to 80 percent of the value of receivables thatare under 90 days. As receivables age past the 90 days,the bank needs to be paid. New funds are advancedas new receivables are established as long as the 80percent and under-90-day criteria are met. Receiv-ables under 90 days can be discounted no more than20 percent, if the bank obligation is to be met. Re-ceivables over 90 days can be discounted as much asis needed to collect them, since they are not secur-ing bank financing. One needs to use judgment indeciding exactly how large a discount to offer. Acommon method is to offer a generous discountwith a time limit on it, after which the discount is no





longer valid. This provides an incentive for the cus-tomer to pay immediately.

Consultants agree it is better to offer too large adiscount than too small a one. If the discount is toosmall and needs to be followed by further discounts,customers may hold off paying in the hope that an-other round of discounts will follow. Generally it isthe slow payers that cause the problems and dis-counting may not help. By getting on the squeaky-wheel list of the particular slow-pay customer, youmight get attention. A possible solution is to put on anote with the objective of having the customer startpaying you on a regular basis; also, adding a small ad-ditional amount to every new order helps to workdown the balance.

Inventory is not as liquid as receivables but still canbe liquidated to generate quick cash. An inventory“fire sale” gets mixed reviews from turnaround ex-perts. The most common objection is that excess in-ventory is often obsolete. The second objection is thatbecause much inventory is work in process, it is not insalable form and requires money to put in salableform. The third is that discounting finished-goods in-ventory may generate cash but is liable to create cus-tomer resistance to restored margins after the com-pany is turned around. The sale of raw materialsinventory to competitors is generally considered thebest route. Another option is to try to sell inventory atdiscounted prices to new channels of distribution. Inthese channels, the discounted prices might not affectthe next sale.

One interesting option for the company with a lotof work-in-process inventory is to ease credit terms. Itoften is possible to borrow more against receivablesthan against inventory. By easing credit terms, thecompany can increase its borrowing capacity to per-haps enough to get cash to finish work in process. Thisoption may be difficult to implement because, by thetime of intervention, the firm’s lenders are likely fol-lowing the company very closely and may veto thearrangements.

Also relevant to generating quick cash is the policyregarding current sales activity. Guiding criteria forthis needs to include increasing the total dollar valueof margin, generating cash quickly, and keeping work-ing capital in its most liquid form. Prices and cash dis-counts need to be increased and credit terms eased.Easing credit terms, however, can conflict with thereceivables policy described above. Obviously, careneeds to be taken to maintain consistency of policy.Easing credit is really an “excess inventory” policy.The overall idea is to leverage policy in favor of cashfirst, receivables second, and inventory third.

Putting all accounts payable on hold is the next op-tion. Clearly, this eases the cash flow burden in thenear term. Although some arrangement to pay sup-

pliers needs to be made, the most important uses ofcash at this stage are meeting payroll and payinglenders. Lenders are important, but if you do not getsuppliers to ship goods you are out of business. Get-ting suppliers to ship is critical. A company with neg-ative cash flow simply needs to “prioritize” its use ofcash. Suppliers are the least likely to force the com-pany into bankruptcy because, under the law, theyhave a low priority claim.

Dealing with Lenders The next step in theturnaround is to negotiate with lenders. To continueto do business with the company, lenders need to besatisfied that there is a workable long-term solution.

However, at the point of intervention, the com-pany is most likely in default on its payments. Or, ifpayments are current, the financial situation hasprobably deteriorated to the point where the com-pany is in violation of loan covenants. It also is likelythat many of the firm’s assets have been pledged ascollateral. To make matters worse, it is likely that thetroubled entrepreneur has been avoiding his or herlenders during the gestation period and has demon-strated that he or she is not in control of the situation.Credibility has been lost.

It is important for a firm to know that it is not thefirst ever to default on a loan, that the lender is usu-ally willing to work things out, and that it is still in aposition to bargain.

Strategically, there are two sources of bargainingpower. The first is that bankruptcy is an unattractiveresult to a lender, despite its senior claims. A low mar-gin business cannot absorb large losses easily. (Recallthat banks typically earn 0.5 percent to 1.0 percent to-tal return on assets.)

The second is credibility. The firm that, through itsturnaround specialist, has diagnosed the problem andproduced a detailed turnaround plan with best-case/worst-case scenarios, the aim of which is to proveto the lender that the company is capable of paying, isin a better bargaining position. The plan details spe-cific actions (e.g., layoffs, assets plays, changes incredit policy, etc.) that will be undertaken, and thisplan must be met to regain credibility.

There are also two tactical sources of bargainingpower. First, there is the strength of the lender’s col-lateral. The second is the bank’s inferior knowledge ofaftermarkets and the entrepreneur’s superior abilityto sell.

The following example illustrates that, when thelender’s collateral is poor, it has little choice but to lookto the entrepreneur for a way out without incurring aloss. It also shows that the entrepreneur’s superiorknowledge of his business and ability to sell can gethimself and the lender out of trouble. One companyin turnaround in the leather business overbought





inventory one year, and, at the same time, a competi-tor announced a new product that made his inventoryalmost obsolete. Since the entrepreneur went to thelender with the problem, the lender was willing towork with him. The entrepreneur had plans to sell theinventory at reduced prices and also to enter a newmarket that looked attractive. The only trouble was heneeded more money to do it, and he was already overhis credit limit. The lender was faced with the certaintyof losing 80 percent of its money and putting its cus-tomer out of business or the possibility of losing moneyby throwing good money after bad. The lender decidedto work with the entrepreneur. It got a higher interestrate and put the entrepreneur on a “full followingmechanism,” which meant that all payments were sentto a lockbox. The lender processed the checks and re-duced its exposure before it put money in his account.

Another example illustrates the existence of bar-gaining power with a lender who is undercollateralizedand stands to take a large loss. A company was import-ing look-alike Cabbage Patch dolls from Europe. Thiswas financed with a letter of credit. However, when thedolls arrived in this country, the company could not sellthe dolls because the Cabbage Patch doll craze wasover. The dolls, and the bank’s collateral, were worth-less. The company found that the doll heads could bereplaced, and with the new heads, the dolls did notlook like Cabbage Patch dolls. It found also that onedoll buyer would buy the entire inventory. The com-pany needed $30,000 to buy the new heads and havethem put on, so it went back to the bank. The banksaid, if the company wanted the money, key membersof management had to give liens on their houses.When this was refused, the banker was astounded. Butwhat was he going to do? The company had found away for him to get his money, so it got the $30,000.

Lenders are often willing to advance money for acompany to meet its payroll. This is largely a publicrelations consideration. Also, if a company does notmeet its payroll, a crisis may be precipitated beforethe lender can consider its options.

When the situation starts to improve, a lender maycall the loan. Such a move will solve the lender’s prob-lem but may put the company under. While manybankers will deny this ever happens, some will concedethat such an occurrence depends on the loan officer.

Dealing with Trade Creditors In dealingwith trade creditors, the first step is to understand thestrength of the company’s bargaining position. Tradecreditors have the lowest priority claims should acompany file for bankruptcy and, therefore, are oftenthe most willing to deal. In bankruptcy, trade credi-tors often receive just a few cents on the dollar.

Another bargaining power boost with trade cred-itors is the existence of a turnaround plan. As long as

a company demonstrates that it can offer a tradecreditor a better result as a going concern than it canin bankruptcy proceedings, the trade creditor shouldbe willing to negotiate. It is generally good to makesure that trade creditors are getting a little money ona frequent basis. Remember trade creditors have ahigher gross margin than a bank, so their getting paidpays down their “risk” money faster. This is espe-cially true if the creditor can ship new goods and getpaid for that, and also get some money toward theold receivables.

Also, trade creditors have to deal with the customerrelations issue. Trade creditors will work with a troubledcompany if they see it as a way to preserve a market.

The relative weakness in the position of trade cred-itors has allowed some turnaround consultants to ne-gotiate impressive deals. For example, one companygot trade creditors to agree to a 24-month paymentschedule for all outstanding accounts. In return, thefirm pledged to keep all new payables current. Theentrepreneur was able to keep the company fromdealing on a cash basis with many of its creditors andto convert short-term payables into what amounted tolong-term debt. The effect on current cash flow wasvery favorable.

The second step is to prioritize trade creditors ac-cording to their importance to the turnaround. Thecompany then needs to take care of those creditorsthat are most important. For example, one entrepre-neur told his controller never to make a commitmenthe could not keep. The controller was told that, if thecompany was going to miss a commitment, he was toget on the phone and call. The most important sup-pliers were told that if something happened and theyneeded payment sooner than had been agreed, theywere to let the company know and it would do its bestto come up with the cash.

The third step in dealing with trade creditors is toswitch vendors if necessary. The lower priority sup-pliers will put the company on cash terms or refuse todo business. The troubled company needs to be ableto switch suppliers, and its relationship with its prior-ity suppliers will help it to do this, because they cangive credit references. One firm said, “We asked ourbest suppliers to be as liberal with credit references aspossible. I don’t know if we could have establishednew relationships without them.”

The fourth step in dealing with trade creditors is tocommunicate effectively. “Dealing with the trade is assimple as telling the truth,” one consultant said. If acompany is honest, at least a creditor can plan.

Workforce Reductions With workforce reduc-tion representing 80 percent of the potential ex-pense reduction, layoffs are inevitable in a turn-around situation.





A number of turnaround specialists recommend thatlayoffs be announced to an organization as a onetimereduction in the workforce and be done all at once.They recommend further that layoffs be accomplishedas soon as possible, since employees will never regaintheir productivity until they feel some measure of secu-rity. Finally, they suggest that a firm cut deeper thanseems necessary to compensate for other remedial ac-tions that may be difficult to implement. For example,it is one thing to set out to reduce capacity by half andquite another thing to sell or sublet half a plant.

Longer-Term Remedial Actions

If the turnaround plan has created enough credibilityand has bought the firm time, longer-term remedialactions can be implemented.

These actions will usually fall into three categories:

Systems and procedures. Systems andprocedures that contributed to the problem canbe improved, or others can be implemented.Asset plays. Assets that could not be liquidatedin a shorter time frame can be liquidated. Forexample, real estate could be sold. Manysmaller companies, particularly older ones,carry real estate on their balance sheet at farbelow market value. This could be sold andleased back or could be borrowed against togenerate cash.Creative solutions. Creative solutions need tobe found. For example, one firm had a largeamount of inventory that was useless in itscurrent business. However, it found that if theinventory could be assembled into parts, therewould be a market for it. The company shippedthe inventory to Jamaica, where labor rateswere low, for assembly, and it was able to sellvery profitably the entire inventory.

As was stated at the beginning of the chapter, manycompanies—even companies that are insolvent orhave negative net worth or both—can be rescued andrestored to profitability. It is perhaps helpful to recallanother quote from Winston Churchill: “I have noth-ing to offer but blood, toil, tears, and sweat.”

Chapter Summary1. An inevitable part of the entrepreneurial process is

that firms are born, grow, get ill, and die.2. Numerous signals of impending trouble—strategic

issues, poor planning and financial controls, andrunning out of cash—invariably point to a core cause:top management.

3. Crises don’t develop overnight. Often it takes 18months to five years before the company is sickenough to trigger a turnaround intervention.

4. Both quantitative and qualitative signals can predictpatterns and actions that could lead to trouble.

5. Bankruptcy, usually an entrepreneur’s nightmare, canactually be a valuable tool and source of bargainingpower to help a company survive and recover.

6. Turnaround specialists begin with a diagnosis of thenumbers—cash, strategic market issues, andmanagement—and develop a turnaround plan.

7. The turnaround plan defines remedial action togenerate cash, deal with lenders and trade creditors,begin long-term renewal, and monitor progress.

Study Questions1. What do entrepreneurs need to know about how

companies get into and out of trouble? Why?2. Why do most turnaround specialists invariably

discover that it is management that is the root causeof trouble?

3. Why is it difficult for existing management to detectand to act early on signals of trouble?

4. What are some key predictors and signals that warnof impending trouble?

5. Why can bankruptcy be the entrepreneur’s ally?6. What diagnosis is done to detect problems, and why

and how does cash play the central role?7. What are the main components of a turnaround plan

and why are these so important?

Internet Sources for Chapter 18http://www.entreworld.orghttp://www.swiggartagin.com/lawfind/http://www.uscourts.gov


1. In the 1970s, IBM had more cash on its balancesheet than the total sales of the rest of thecomputer industry. Why, and how, did IBM getinto so much trouble 10 years later?

2. Talk in person to an entrepreneur who haspersonal loan guarantees and has been throughbankruptcy. What lessons were learned?

3. Can Microsoft become a troubled company?When, and why?


V. Startup and After 19. The Harvest and Beyond


A Journey, Not a Destination

A common sentiment among successful entrepre-neurs is that it is the challenge and exhilaration of thejourney that gives them the greatest kick. PerhapsWalt Disney said it best: “I don’t make movies tomake money. I make money to make movies.” It is thethrill of the chase that counts.

These entrepreneurs also talk of the venture’s in-credibly insatiable appetite for not only cash but alsotime, attention, and energy. Some say it is an addic-tion. Most say it is far more demanding and difficultthan they ever imagined. Most, however, plan not toretire and would do it again, usually sooner ratherthan later. They also say it is more fun and satisfyingthan any other career they have had.

For the vast majority of entrepreneurs, it takes 10,15, even 20 years or more to build a significant networth. According to the popular press and governmentstatistics, there are more millionaires than ever inAmerica. In 2002, it is estimated that as many as 3.5 mil-lion persons in the United States (or nearly 3 percent ofthe working population) will be millionaires—their net

worth exceeding $1 million. Sadly, a million dollars isnot really all that much money today as a result of infla-tion, and while lottery and sweepstakes winners be-come instant millionaires, entrepreneurs do not. Thenumber of years it usually takes to accumulate such anet worth is a far cry from the instant millionaire, theget-rich-quick impression associated with lottery win-ners or in fantasy TV shows.

The Journey Can Be Addictive

The total immersion required, the huge workload,the many sacrifices for a family, and the burnout of-ten experienced by an entrepreneur are real. Main-taining the energy, enthusiasm, and drive to getacross the finish line, to achieve a harvest, may beexceptionally difficult. For instance, one entrepre-neur in the computer software business, after work-ing alone for several years, developed highly so-phisticated software. Yet, he insisted he could notstand the computer business for another day. Imag-ine trying to position a company for sale effectively

19Chapter Nineteen

The Harvest and Beyond“And don’t forget: Shrouds have no pockets.”

the late Sidney RabbChairman Emeritus, Stop & Shop, Boston

Results ExpectedUpon completion of this chapter, you will have:1. Examined the importance of first building a great company and thereby creating

harvest options.2. Examined why harvesting is an essential element of the entrepreneurial process and

does not necessarily mean abandoning the company.3. Identified the principal harvest options, including going public.4. Analyzed the Paul J. Tobin case study.

605





and to negotiate a deal for a premium price aftersuch a long battle.

Some entrepreneurs wonder if the price of victoryis too high. One very successful entrepreneur put itthis way:

What difference does it make if you win, have $20 mil-lion in the bank—I know several who do—and you area basket case, your family has been washed out, and yourkids are a wreck?

The opening quote of the chapter is a sobering re-minder and its message is clear: Unless an entrepreneurenjoys the journey and thinks it is worthy, he or she mayend up on the wrong train to the wrong destination.

First Build a Great Company

One of the simplest but most difficult principles fornon-entrepreneurs to grasp is that wealth and liquidityare results—not causes—of building a great company.They fail to recognize the difference between makingmoney and spending money. Most successful entre-preneurs possess a clear understanding of this distinc-tion; they get their kicks from growing the company.They know the payoff will take care of itself if they con-centrate on the money-making part of the process.

Create Harvest Options

Here is yet another great paradox in the entrepre-neurial process: Build a great company but do not for-get to harvest. This apparent contradiction is difficultto reconcile, especially among entrepreneurs withseveral generations in a family-owned enterprise.Perhaps a better way to frame this apparent contra-diction is to keep harvest options open and to think ofharvesting as a vehicle for reducing risk and for creat-ing future entrepreneurial choices and options, notsimply selling the business and heading for the golfcourse or the beach, although these options may ap-peal to a few entrepreneurs. To appreciate the im-portance of this perspective, consider the followingactual situations

An entrepreneur in his 50s, Nigel reached anagreement with Brian, a young entrepreneur in his30s, to join the company as marketing vice president.Their agreement also included an option for Brian toacquire the company in the next five years for $1.5 mil-lion. At the time, the firm, a small biscuit maker, hadrevenues of $500,000 per year. By the end of the third

year, Brian had built the company to $5 million insales and substantially improved profitability. He no-tified Nigel of his intention to exercise his option tobuy the company. Nigel immediately fired Brian, whohad no other source of income, had a family, and a$400,000 mortgage on a house whose fair marketvalue had dropped to $275,000. Brian learned thatNigel had also received an offer from a company for$6 million. Thus, Nigel wanted to renege on his orig-inal agreement with Brian. Unable to muster the le-gal resources, Brian settled out of court for less than$100,000. When the other potential buyer learnedhow Nigel had treated Brian, it withdrew the $6 mil-lion offer. Then, there were no buyers. Within twoyears, Nigel drove the company into bankruptcy. Atthat point, he called Brian and asked if he would nowbe interested in buying the company. Brian suggestedthat Nigel go perform certain unnatural anatomicalacts on himself!

In a quite different case, a buyer was willing to pur-chase a 100-year-old family business for $100 million,a premium valuation by any standard. The family in-sisted that it would never sell the business under anycircumstances. Two years later, market conditionschanged and the credit crunch transformed slow-paying customers into nonpaying customers. Thebusiness was forced into bankruptcy, which wiped out100 years of family equity.

It is not difficult to think of a number of alternativeoutcomes for these two firms and many others likethem, who have erroneously assumed that the busi-ness will go on forever. By stubbornly and steadfastlyrefusing to explore harvest options and exiting as anatural part of the entrepreneurial process, ownersmay actually increase their overall risk and deprivethemselves of future options. Innumerable examplesexist whereby entrepreneurs sold or merged theircompanies and then went on to acquire or to start an-other company and pursued new dreams:

Robin Wolaner founded Parenting magazine inthe mid-1980s and sold it to Time-Life.1

Wolaner then joined Time and built a highlysuccessful career there, and in July 1992, shebecame the head of Time’s Sunset PublishingCorporation.2

Right after graduate school, the two brothersdescribed in the Securities Online case inChapter 5 launched the company Gary hadworked on creating as a MBA student. Thatcompany rapidly became quite successful andwas sold in early 2000 for more than $50 million.About three years into the startup, younger

1 This example is drawn from “Parenting Magazine,” Harvard Business School case study 291-015.2 Lawrence M. Fisher, “The Entrepreneur Employee,” New York Times, August 2, 1992, p. 10.




Chapter 19 The Harvest and Beyond 607

brother George decided he would pursue hisown startup. He left Securities Online on thebest of terms and created ColorKinetics, Inc.,in Boston. That company, by early 2003, hadraised over $48 million of venture capital andwould soon exceed $30 million in sales as theleading firm in LED lighting technology. Thesewill not be either Gary’s or George’s laststartup, we predict.Craig Benson founded Cabletron in the 1980s,which became a highly successful company.Eventually he brought in a new CEO andbecame involved as a trustee of BabsonCollege, and then began teachingentrepreneurship classes with a focus oninformation technology and the Internet. Hehas just been elected governor of NewHampshire, as another way of giving back tosociety and to pursue his new dreams.While in his early 20s, Steve Spinelli wasrecruited by his former college football coach,Jim Hindman (see the Jiffy Lube case series),to help start and build Jiffy Lube International.As a captain of the team, Steve had exhibitedthe qualities of leadership, tenacity, andcompetitive will to win that Hindman knew wasneeded to create a new company. Steve laterbuilt the largest franchise in America, and afterselling his 44 stores to Pennzoil in 1993, hereturned to his MBA alma mater to teach. Soinvigorated by this new challenge, he even wentback to earn his doctorate and then becamedirector of the Arthur M. Blank Center forEntrepreneurship at Babson, and first divisionchair of the very first full-fledgedEntrepreneurship Division at any Americanuniversity.After creating and building the ninth largestpharmaceutical company in the United States,Marion Laboratories, Ewing Marion Kauffmanled an extraordinary life as philanthropist andsportsman. His Kauffman Foundation and itsCenter for Entrepreneurial Leadership becamethe first and premier foundation in the nationdedicated to accelerating entrepreneurship. Hebrought the Kansas City Royals baseball teamto that city and made sure it would stay thereby gifting the team to the city, with thestipulation that it stay there when the team was sold. The $75 million proceeds of the salewere also donated to charitable causes inKansas City.

Jeff Parker built and sold two companies,including Technical Data Corporation,3 by thetime he was 40. His substantial gain from theseventures has led to a new career as a privateinvestor who works closely with youngentrepreneurs to help them build theircompanies.In mid-1987, George Knight, founder andpresident of Knight Publications,4 was activelypursuing acquisitions to grow his company intoa major force. Stunned by what he believed tobe exceptionally high valuations for smallcompanies in the industry, he concluded thatthis was the time to be a seller rather than abuyer. Therefore, in 1988, he sold KnightPublications to a larger firm, within which hecould realize his ambition of contributing as achief executive officer to the growth of a majorcompany. Having turned around the troubleddivisions of this major company, he is currentlyseeking a small company to acquire and to growinto a large company.

These are a tiny representation of the tens of thou-sands of entrepreneurs that build on their platformsof entrepreneurial success to pursue highly meaning-ful lives in philanthropy, public service, and commu-nity leadership. By realizing a harvest, such optionsbecome possible, yet the vast majority of entrepre-neurs make these contributions to society while con-tinuing to build their companies. This is one of thebest-kept secrets in American culture: The public hasvery little awareness and appreciation of just howcommon this pattern of generosity is of their time,their leadership, and their money. One could fill abook with numerous other examples. The entrepre-neurial process is endless.

A Harvest Goal

Having a harvest goal and crafting a strategy toachieve it are what separate successful entrepre-neurs from the rest of the pack. Many entrepreneursseek only to create a job and a living for themselves.It is quite different to grow a business that creates aliving for many others, including employees and in-vestors, by creating value—value that can result in acapital gain.

Setting a harvest goal achieves many purposes, notthe least of which is helping an entrepreneur get after-tax cash out of an enterprise and enhancing substantially

3 For TDC’s business plan, see “Technical Data Corporation Business Plan,” Harvard Business School case 283–973. Revised November 1987. For more on TDC’sprogress and harvest strategy, see “Technical Data Corporation,” Harvard Business School case 283–072. Revised December 1987.

4 For a detailed description of this process, see Harvard Business School case 289-027, revised February 1989.





his or her net worth. Such a goal also can create highstandards and a serious commitment to excellenceover the course of developing the business. It can pro-vide, in addition, a motivating force and a strategic fo-cus that does not sacrifice customers, employees, andvalue-added products and services just to maximizequarterly earnings.

There are other good reasons to set a harvest goalas well. The workload demanded by a harvest-orientedventure versus one in a venture that cannot achieve aharvest may actually be less and is probably no greater.Such a business may be less stressful than managing abusiness that is not oriented to harvest. Imagine theplight of the 46-year-old entrepreneur, with three chil-dren in college, whose business is overleveraged andon the brink of collapse. Contrast that frightful pres-sure with the position of the founder and major stock-holder of another venture who, at the same age, soldhis venture for $15 million. Further, the options opento the harvest-oriented entrepreneur seem to rise geo-metrically in that investors, other entrepreneurs,bankers, and the marketplace respond.

There is great truth in the old cliché that “successbreeds success.”

There is a very significant societal reason as well forseeking and building a venture worthy of a harvest.These are the ventures that provide enormous impactand value added in a variety of ways. These are thecompanies that contribute most disproportionately totechnological and other innovations, to new jobs, toreturns for investors, and to economic vibrancy.

Also, within the harvest process, the seeds of re-newal and reinvestment are sown. Such a recycling ofentrepreneurial talent and capital is at the very heartof our system of private responsibility for economicrenewal and individual initiative. Entrepreneurialcompanies organize and manage for the long haul inways to perpetuate the opportunity creation andrecognition process and thereby to ensure economicregeneration, innovation, and renewal.

Thus, a harvest goal is not just a goal of selling andleaving the company. Rather, it is a long-term goal tocreate real value added in a business. (It is true, how-ever, that if real value added is not created, the businesssimply will not be worth much in the marketplace.)

Crafting a Harvest Strategy: Timing Is Vital

Consistently, entrepreneurs avoid thinking about har-vest issues. In a survey of the computer software in-dustry between 1983 and 1986, Steven Holmberg

found that 80 percent of the 100 companies surveyedhad only an informal plan for harvesting. The rest ofthe sample confirmed the avoidance of harvest plansby entrepreneurs—only 15 percent of the companieshad a formal written strategy for harvest in their busi-ness plans and the remaining 5 percent had a formalharvest plan written after the business plan.5 When acompany is launched, then struggles for survival, andfinally begins its ascent, the farthest thing from itsfounder’s mind usually is selling out. Selling is oftenviewed by the entrepreneur as the equivalent to com-plete abandonment of his or her very own “baby.”

Thus, time and again, a founder does not considerselling until terror, in the form of the possibility of los-ing the whole company, is experienced. Usually, thispossibility comes unexpectedly: New technologythreatens to leapfrog over the current product line, alarge competitor suddenly appears in a small market,or a major account is lost. A sense of panic then gripsthe founders and shareholders of the closely heldfirm, and the company is suddenly for sale—for saleat the wrong time, for the wrong reasons, and thus forthe wrong price. Selling at the right time, willingly, in-volves hitting a strategic window; one of the manystrategic windows that entrepreneurs face.

Entrepreneurs find that harvesting is a nonissueuntil something begins to sprout, and again there is avast distance between creating an existing revenuestream of an ongoing business and ground zero. Mostentrepreneurs agree that securing customers andgenerating continuing sales revenue are much harderand take much longer than even they could haveimagined. Further, the ease with which those revenueestimates can be cast and manipulated on a spread-sheet belies the time and effort necessary to turnthose projections into cash.

At some point, with a higher potential venture, itbecomes possible to realize the harvest. It is wiser tobe selling as the strategic window is opening than asit is closing. Bernard Baruch’s wisdom is as good as itgets on this matter. He has said, “I made all mymoney by selling too early.” For example, a privatecandy company with $150 million in sales was notconsidering selling. After contemplating advice tosell early, the founders recognized a unique opportu-nity to harvest and sold the firm for 19 times earn-ings, an extremely high valuation. Another example isthat of a cellular phone company that was launchedand built from scratch and began operations in late1987. Only 18 months after purchasing the originalrights to build and operate the system, the foundersdecided to sell the company, even though the futurelooked extremely bright. They sold because the sell-ers’ market they faced at the time had resulted in a

5 Steven R. Holmberg, “Value Creation and Capture: Entrepreneurship Harvest and IPO Strategies,” in Frontiers of Entrepreneurship Research: 1991, ed. NeilChurchill et al. (Babson Park, MA: Babson College, 1991), pp. 191–205.





premium valuation—30 percent higher on a percapita basis (the industry valuation norm) than thatfor any previous cellular transaction to date. The har-vest returned over 25 times the original capital in ayear and a half. (The founders had not invested adime of their own money.)

If the window is missed, disaster can strike. Forexample, at the same time as the harvests describedabove were unfolding, another entrepreneur sawhis real estate holdings rapidly appreciate to nearly$20 million, resulting in a personal net worth, onpaper, of nearly $7 million. The entrepreneur usedthis equity to refinance and leverage existing prop-erties (to more than 100 percent in some cases) toseize what he perceived as further prime opportu-nities. Following a change in federal tax law in 1986and the stock market crash of 1987, there was a ma-jor softening of the real estate market in 1988. As aresult, by early 1989, half of the entrepreneur’sholdings were in bankruptcy and the rest were in ahighly precarious and vulnerable position. Theprior equity in the properties had evaporated, leav-ing no collateral as increasing vacancies and lowerrents per square foot turned a positive cash flowinto a negative one.

This very same pattern happened again in2000–2002 after the dot.com bubble burst and theNASDAQ began to crash, losing 63 percent of itsvalue from its high of over 5000 to under 2000. Cali-fornia’s Silicon Valley was particularly hard hit by therapid downturn. Technology and Internet entrepre-neurs who had exercised their stock options whentheir company’s stock was soaring in the $80 to $100range, on the hope that such escalation would con-tinue for a long time, faced a rude a awakening. As thestock plummeted to single-digit prices, they stillfaced a huge capital gain tax on the difference be-tween the cost of their options and the price at whichtheir stock was acquired. In one community of morethan 2,000 homes priced at $1 million and up, onlythree or four were on the market in January 2001. Bythe middle of 2001, nearly 60 such homes were forsale. Nationwide in 2001, the sale of homes pricedabove $1 million dropped 25 percent.

Shaping a harvest strategy is an enormously com-plicated and difficult task. Thus, crafting such a strat-egy cannot begin too early. In 1989–91, banking poli-cies that curtailed credit and lending severelyexacerbated the downturn following the October1987 stock market crash. One casualty of this was acompany we shall call Cable TV. The value of thecompany in early 1989 exceeded $200 million. Bymid-1990, this had dropped to below zero! The heavydebt overwhelmed the company. It took over fiveyears of sweat, blood, tears, and rapid aging of thefounder to eventually sell the company. The price:about one-quarter of the peak value of 1989!

This same pattern was common again in 2001 and2002, as major companies declared bankruptcy in thewake of the dot.com and stock market crash, includ-ing luminaries such an Enron, Kmart, Global Cross-ing, and dozens of lesser known but larger telecom-munications and networking-related companies. Thisis one history lesson that seems to repeat itself. Whilebuilding a company is the ultimate goal, failure topreserve the harvest option, and utilize it when it isavailable, can be deadly.

In shaping a harvest strategy, some guidelines andcautions can help:

Patience. As has been shown, several years arerequired to launch and build most successfulcompanies; therefore, patience can beinvaluable. A harvest strategy is more sensible ifit allows for a time frame of at least 3 to 5 yearsand as long as 7 to 10 years. The other side ofthe patience coin is not to panic as a result ofprecipitate events. Selling under duress isusually the worst of all worlds.Realistic valuation. If impatience is the enemyof an attractive harvest, then greed is itsexecutioner. For example, an excellent, smallfirm in New England, which was nearly 80 yearsold and run by the third generation of a line ofsuccessful family leaders, had attracted anumber of prospective buyers and had obtaineda bona fide offer for more than $25 million.The owners, however, had become convincedthat this “great little company” was worthconsiderably more, and they held out. Beforelong, there were no buyers, and marketcircumstances changed unfavorably. Inaddition, interest rates skyrocketed. Soonthereafter, the company collapsed financially,ending up in bankruptcy. Greed was theexecutioner.Outside advice. It is difficult but worthwhile tofind an advisor who can help craft a harveststrategy while the business is growing and, atthe same time, maintain objectivity about itsvalue and have the patience and skill tomaximize it. A major problem seems to be thatpeople who sell businesses, such as investmentbankers or business brokers, are performing thesame economic role and function as real estatebrokers; in essence, their incentive is theircommissions during a quite short time frame,usually a matter of months. However, anadvisor who works with a lead entrepreneur foras much as five years or more can help shapeand implement a strategy for the wholebusiness so that it is positioned to spot andrespond to harvest opportunities when theyappear.





Harvest Options

There are seven principal avenues by which a com-pany can realize a harvest from the value it has cre-ated. Described below, these most commonly seem tooccur in the order in which they are listed. No at-tempt is made here to do more than briefly describeeach avenue, since there are entire books written oneach of these, including their legal, tax, and account-ing intricacies.

Capital Cow

A “capital cow” is to the entrepreneur what a “cashcow” is to a large corporation. In essence, the high-margin profitable venture (the cow) throws off morecash for personal use (the milk) than most entrepre-neurs have the time and uses or inclinations forspending. The result is a capital-rich and cash-richcompany with enormous capacity for debt and rein-vestment. Take, for instance, a health care-relatedventure that was started in the early 1970s that real-ized early success and went public. Several years later,the founders decided to buy the company back fromthe public shareholders and to return it to its closelyheld status. Today the company has sales in excess of$100 million and generates extra capital of severalmillion dollars each year. This capital cow has enabledits entrepreneurs to form entities to invest in severalother higher potential ventures, which included par-ticipation in the leveraged buyout of a $150 millionsales division of a larger firm and in some venturecapital deals.

Employee Stock Ownership Plan

Employee stock ownership plans have become verypopular among closely held companies as a valuationmechanism for stock for which there is no formalmarket. They are also vehicles through whichfounders can realize some liquidity from their stockby sales to the plan and other employees. And sincean ESOP usually creates widespread ownership ofstock among employees, it is viewed as a positive mo-tivational device as well.

Management Buyout

Another avenue, called a management buyout(MBO), is one in which a founder can realize a gainfrom a business by selling it to existing partners or toother key managers in the business. If the businesshas both assets and a healthy cash flow, the financingcan be arranged via banks, insurance companies, and

financial institutions that do leveraged buyouts(LBOs) and MBOs. Even if assets are thin, a healthycash flow that can service the debt to fund the pur-chase price can convince lenders to do the MBO.

Usually, the problem is that the managers whowant to buy out the owners and remain to run thecompany do not have the capital. Unless the buyerhas the cash up front—and this is rarely the case—such a sale can be very fragile, and full realization ofa gain is questionable. MBOs typically require theseller to take a limited amount of cash up front and anote for the balance of the purchase price over sev-eral years. If the purchase price is linked to the futureprofitability of the business, the seller is totally de-pendent on the ability and integrity of the buyer. Fur-ther, the management, under such an arrangement,can lower the price by growing the business as fast aspossible, spending on new products and people, andshowing very little profit along the way. In these cases,it is often seen that after the marginally profitablebusiness is sold at a bargain price, it is well positionedwith excellent earnings in the next two or three years.As can be seen, the seller will end up on the short endof this type of deal.

Merger, Acquisition, and Strategic Alliance

Merging with a firm is still another way for a founderto realize a gain. For example, two founders who haddeveloped high-quality training programs for therapidly emerging personal computer industry con-summated a merger with another company. Theseentrepreneurs had backgrounds in computers, ratherthan in marketing or general management, and theresults of the company’s first five years reflected thisgap. Sales were under $500,000, based on customprograms and no marketing, and they had been un-able to attract venture capital, even during the mar-ket of 1982–1983. The firm with which they mergedwas a $15 million company that had an excellent rep-utation for its management training programs, had aFortune 1000 customer base, had repeat sales of70 percent, and had requests from the field sales forcefor programs to train managers in the use of personalcomputers. The buyer obtained 80 percent of theshares of the smaller firm, to consolidate the revenuesand earnings from the merged company into its ownfinancial statements, and the two founders of thesmaller firm retained a 20 percent ownership in theirfirm. The two founders also obtained employmentcontracts, and the buyer provided nearly $1.5 millionof capital advances during the first year of the newbusiness. Under a put arrangement, the founders willbe able to realize a gain on their 20 percent of the





company, depending upon performance of the ven-ture over the next few years.6 The two founders noware reporting to the president of the parent firm, andone founder of the parent firm has taken a key exec-utive position with the smaller company, an approachcommon for mergers between closely held firms.

In a strategic alliance, founders can attract badlyneeded capital, in substantial amounts, from a largecompany interested in their technologies. Sucharrangements often can lead to complete buyouts ofthe founders downstream.

Outright Sale

Most advisors view outright sale as the ideal route togo because up-front cash is preferred over most stock,even though the latter can result in a tax-free ex-change.7 In a stock-for-stock exchange, the problemis the volatility and unpredictability of the stock priceof the purchasing company. Many entrepreneurshave been left with a fraction of the original purchaseprice when the stock price of the buyer’s company de-clined steadily. Often the acquiring company wants tolock key management into employment contracts forup to several years. Whether this makes sense de-pends on the goals and circumstances of the individ-ual entrepreneur.

Public Offering

Probably the most sacred business school cow ofthem all—other than the capital cow—is the notion oftaking a company public.8 The vision or fantasy ofhaving one’s venture listed on one of the stock ex-changes arouses passions of greed, glory, and great-ness. For many would-be entrepreneurs, this aspira-tion is unquestioned and enormously appealing. Yet,for all but a chosen few, taking a company public, andthen living with it, may be far more time and trouble—and expense—than it is worth.

After the stock market crash of October 1987, themarket for new issues of stock shrank to a fraction ofthe robust IPO market of 1986 and a fraction ofthose of 1983 and 1985, as well. The number of newissues and the volume of IPOs did not rebound, in-stead, they declined between 1988 and 1991. Then

in 1992 and into the beginning of 1993 the IPO win-dow opened again. During this IPO frenzy, “smallcompanies with total assets under $500,000 issuedmore than 68 percent of all IPOs.”9 Previously, smallcompanies had not been as active in the IPO market.(Companies such as Lotus, Compaq, and AppleComputer do get unprecedented attention and fan-fare, but these firms were truly exceptions.)10 TheSEC tried “to reduce issuing costs and registrationand reporting burdens on small companies, and be-gan by simplifying the registration process by adopt-ing Form S-18, which applies to offerings of lessthan $7,500,000, and reduced disclosure require-ments.”11 Similarly, Regulation D created exemp-tions from registration up to $500,000 over a 12month period.12

This cyclical pattern repeated itself again duringthe mid-1990s into 2002. As the dot.com, telecom-munications, and networking explosion acceleratedfrom 1995 to 2000, the IPO markets exploded as well.In June 1996, for instance, nearly 200 small compa-nies had initial public offerings, and the pace re-mained very strong through 1999, even into the firsttwo months of 2000. Once the NASDAQ began itscollapse in March 2000, the IPO window virtuallyshut. In 2001, there were months when not a singleIPO occurred and for the year it was well under 100!Few signs of recovery were evident in 2002. The les-son is clear: Depending upon the IPO market for aharvest is a highly cyclical strategy, which can causeboth great joy and disappointment. Such is the realityof the stock markets. Exhibits 19.1(A) and 19.1(B)show this pattern vividly.

There are several advantages to going public,many of which relate to the ability of the company tofund its rapid growth. Public equity markets provideaccess to long-term capital, while also meeting sub-sequent capital needs. Companies may use the pro-ceeds of an IPO to expand the business in the exist-ing market or to move into a related market. Thefounders and initial investors might be seeking liq-uidity, but SEC restrictions limiting the timing andthe amount of stock that the officers, directors, andinsiders can dispose of in the public market are in-creasingly severe. As a result, it can take several yearsafter an IPO before a liquid gain is possible. Addi-tionally, as Jim Hindman believed, a public offering

6 This is an arrangement whereby the two founders can force (the put) the acquirer to purchase their 20 percent at a predetermined and negotiated price.7 See several relevant articles on selling a company in Growing Concerns, ed. David E. Gumpert (New York: John Wiley & Sons, 1984), pp. 332–98.8 The Big Five accounting firms, such as Ernst & Young, publish information on deciding to take a firm public, as does NASDAQ. See also Richard Salomon, “Second

Thoughts on Going Live with Wall Street,” Harvard Business Review, reprint No. 91309.9Seymour Jones , M. Bruce Cohen, and Victor V. Coppola, “Going Public,” in The Entrepreneurial Venture, ed. William A. Sahlman and Howard H. Stevenson

(Boston: Harvard Business School Publishing, 1992), p. 394.10 For an updated discussion of these issues, see Constance Bagley and Craig Dauchy, “Going Public,” in The Entrepreneurial Venture, 2nd ed. W. A. Sahlman and

H. H. Stevenson (Boston: Harvard Business School Publishing, 1999), pp. 404–40.11 Jones et al., p. 395.12Ibid.





not only increases public awareness of the companybut also contributes to the marketability of the prod-ucts, including franchises.

However, there are also some disadvantages tobeing a public company. For example, 50 percent ofthe computer software companies surveyed byHolmberg agreed that the focus on short-term prof-its and performance results was a negative attributeof being a public company.13 Also, because of thedisclosure requirements, public companies lose

some of their operating confidentiality, not to men-tion having to support the ongoing costs of publicdisclosure, audits, and tax filings. With publicshareholders, the management of the company hasto be careful about the flow of information becauseof the risk of insider trading. Thus, it is easy to seewhy companies need to think about the positive andnegative attributes of being a public company.When considering this decision, you may find ituseful to review the Paul J. Tobin case at the end ofthe chapter to identify the key components of theIPO process and to assess which investmentbankers, accountants, lawyers, and advisors mightbe useful in making this decision.

Wealth-Building Vehicles

The 1986 Tax Reform Act severely limited the gener-ous options previously available to build wealthwithin a private company through large deductiblecontributions to a retirement plan. To make mattersworse, the administrative costs and paperwork neces-sary to comply with federal laws have become a night-mare. Nonetheless, there are still mechanisms thatcan enable an owner to contribute up to 25 percent ofhis or her salary to a retirement plan each year, anamount that is deductible to the company and growstax free. Entrepreneurs who can contribute suchamounts for just a short time will build significantwealth.

Beyond the Harvest

A majority of highly successful entrepreneurs seem toaccept a responsibility to renew and perpetuate thesystem that has treated them so well. They are keenlyaware that our unique American system of opportu-nity and mobility depends in large part upon a self-renewal process.

There are many ways in which this happens. Someof the following data often surprise people:

College endowments. Entrepreneurs are themost generous regarding larger gifts and themost frequent contributors to collegeendowments, scholarship funds, and the like.At Babson College, for example, one studyshowed that eight times as manyentrepreneurs, compared to all othergraduates, made large gifts to their colleges.14

900800700600500400300200100

0

Years 1996 through 20011996 1997 1998 1999 2000 2001

IPO VC Backed IPOS

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.001996 1997 1998 1999 2000 2001

Total Venture-Backed Offer Size ($ Million)

Years 1996 through 2001

EXHIBIT 19.1(A)

Number of Recent IPOs

Source: Thomson Financial/Venture Economics and National VentureCapital Association, January 7, 2002.

EXHIBIT 19.1(B)

Recent IPO ($millions)

Source: Thomson Financial/Venture Economics and National VentureCapital Association, January 7, 2002.

13Holmberg, “Value Creation and Capture,” p. 203.14 John A. Hornaday, “Patterns of Annual Giving,” in Frontiers of Entrepreneurship Research, 1984, ed. J. Hornaday et al. (Babson Park, MA: Babson College, 1984).





On college and university campuses acrossAmerica, a huge number of dorms, classroombuildings, arts centers, and athletic facilitiesare named for the contributor. In virtuallyevery case, these contributors areentrepreneurs whose highly successfulcompanies enabled them to make major giftsof stock to their alma mater. Earlier at MIT,more than half of the endowment was fromgifts of founders’ stock. Today that figure isprobably even higher.Community activities. Entrepreneurs whohave harvested their ventures very oftenreinvest their leadership skills and money insuch community activities as symphonyorchestras, museums, and local colleges anduniversities. These entrepreneurs lead fund-raising campaigns, serve on boards ofdirectors, and devote many hours to othervolunteer work. One Swedish couple, afterspending six months working with venturecapital firms in Silicon Valley and New York,was “astounded at the extent to which theseentrepreneurs and venture capitalists engagein such voluntary, civic activities.” The couplefound this pattern in sharp contrast to theSwedish pattern, where paid governmentemployees perform many of the same servicesas part of their jobs.Investing in new companies. Postharvestentrepreneurs also reinvest their efforts andresources in the next generation ofentrepreneurs and their opportunities.Successful entrepreneurs behave this way sincethey seem to know that perpetuating thesystem is far too important, and too fragile, tobe left to anyone else. They have learned thehard lessons.

The innovation, the job creation, and the eco-nomic renewal and vibrancy are all results of the en-trepreneurial process. Government does not causethis complicated and little understood process,though it facilitates and/or impedes it. It is notcaused by the stroke of a legislative pen, though itcan be ended by such a stroke. Rather, entrepre-neurs, investors, and hardworking people in pursuitof opportunities create it.

Fortunately, entrepreneurs seem to accept a dis-proportionate share of the responsibility to make surethe process is renewed. And, judging by the new waveof entrepreneurship in the United States, both themarketplace and society once again are prepared toallocate the rewards to entrepreneurs that are com-mensurate with their acceptance of responsibility anddelivery of results.

The Road Ahead: Devise a PersonalEntrepreneurial Strategy

Goals Matter—A Lot!

Of all the anchors one can think of in the entrepre-neurial process, two loom above all the rest:

1. A passion for achieving goals.2. A relentless competitive spirit and desire

to win.

These two habits drive the quest for learning, per-sonal growth, continuous improvement, and all otherdevelopment. Without these good habits, most questswill fall short. The next chapter includes an exerciseon Crafting a Personal Entrepreneurial Strategy.Completing this lengthy exercise will help you de-velop these good habits.

Values and Principles Matter—A Lot!

We have demonstrated, in numerous places through-out the book, that values and principles matter a greatdeal. We have encouraged you to consider those ofEwing M. Kauffman and to develop your own an-chors. This is a vital part of your leadership approach,and who and what you are:

Treat others as you would want to be treated.Share the wealth with those high performerswho help you create it.Give back to the community and society.

We would add a fourth principle in the NativeAmerican spirit of considering every action with theseventh generational impact foremost in mind:

Be a guardian and a steward of the air, land,water, and environment.

One major legacy of the coming generations of en-trepreneurial leaders can be the sustainability of oureconomic activities. It is possible to combine a pas-sion for entrepreneurship with love of the land andthe environment. The work of such organizations asthe Conservation Fund of Arlington, Virginia, the Na-ture Conservancy, the Trust for Public Land, theHenry’s Fork Foundation, the Monadnock Conser-vancy in New Hampshire, and dozens of others is fi-nancially made possible by the contributions ofmoney, time, and leadership from highly successfulentrepreneurs. It is also one of the most durable waysto give back. Practicing what he preaches, ProfessorTimmons and his wife recently made a permanent giftof nearly 500 acres of their New Hampshire farm to aconservation easement. Other neighbors joined in fora combined total of over 1,000 acres of land preserved





forever, never to be developed. This has led to a re-gional movement as well, which involves landownersfrom a dozen surrounding towns.

Seven Secrets of Success

The following seven secrets of success are includedfor your contemplation and amusement:

1. There are no secrets. Understanding andpracticing the fundamentals discussed here,along with hard work, will get results.

2. As soon as there is a secret, everyone elseknows about it, too. Searching for secrets is amindless exercise.

3. Happiness is a positive cash flow.4. If you teach a person to work for others, you

feed him or her for a year, but if you teach aperson to be an entrepreneur, you feed himor her, and others, for a lifetime.

5. Do not run out of cash.6. Entrepreneurship is fundamentally a human

process, rather than a financial ortechnological process. You can make anenormous difference.

7. Happiness is a positive cash flow.

Chapter Summary1. Entrepreneurs thrive on the challenges and

satisfactions of the game: It is a journey, not adestination.

2. First and foremost, successful entrepreneurs strive tobuild a great company; wealth follows that process.

3. Harvest options mean more than simply selling thecompany, and these options are an important part ofthe entrepreneur’s know-how.

4. Entrepreneurs know that to perpetuate the systemfor future generations, they must give back to theircommunities and invest time and capital in the nextentrepreneurial generation.

Study Questions1. Why did Walt Disney say, “I don’t make movies to

make money. I make money to make movies”?2. Why is it essential to focus first on building a great

company, rather than on just getting rich?

3. Why is a harvest goal so crucial for entrepreneurs andthe economy?

4. Define the principal harvest options, the pros andcons of each, and why each is valuable.

5. Beyond the harvest, what do entrepreneurs do to“give back,” and why is this so important to theircommunities and the nation?

Internet Resources for Chapter 19http://www.nvca.org - National Veature CapitalAssociationhttp://www.nasdaq.comhttp://www.businessweek.comhttp://www.entreworld.org - Kauffman Foundation

Books of InterestTom Ashbrook, The LeapRandy Komisar, The Monk and the RiddleJerry Kaplan, Startup


1. The Outdoor Scene company became the largestindependent tent manufacturer in North America,but eventually went out of business. The foundernever realized a dime of capital gain. Why?

2. When Steve Pond sold his company in the late1980s, he wrote checks for hundreds of thousandsof dollars to several people who had left thecompany up to several years previously, but whohad been real contributors to the early success ofthe company. What are the future implications forSteve? For you?

3. Dorothy Stevenson, the first woman to earn a hamradio license in Utah, said, “Success is gettingwhat you want. Happiness is wanting what youget.” What does this mean? Why should you care?


V. Startup and After 20. Crafting a Personal Entrepreneurial Strategy


Crafting a personal entrepreneurial strategy can beviewed as the personal equivalent of developing abusiness plan. As with planning in other situations,the process itself is more important than the plan.

The key is the process and discipline that put an in-dividual in charge of evaluating and shaping choicesand initiating action that makes sense, rather than let-ting things just happen. Having a longer-term senseof direction can be highly motivating. It also can beextremely helpful in determining when to say no(which is much harder than saying yes) and can tem-per impulsive hunches with a more thoughtful strate-gic purpose. This is important because today’s choices,whether or not they are thought out, become tomor-row’s track record. They may end up shaping an en-trepreneur in ways that he or she may not find so at-tractive 10 years hence and, worse, may also result infailure to obtain those experiences needed to havehigh-quality opportunities later.

Therefore, a personal strategy can be invaluable,but it need not be a prison sentence. It is a point of de-

parture, rather than a contract of indenture, and it canand will change over time. This process of developinga personal strategy for an entrepreneurial career is avery individual one and, in a sense, one of self-selec-tion. One experienced venture capital investor in smallventures, Louis L. Allen, shares this view of the impor-tance of the role of self-selection:

Unlike the giant firm that has recruiting and selection ex-perts to screen the wheat from the chaff, the small businessfirm, which comprises the most common economic unit in ourbusiness systems, cannot afford to employ a personnel man-ager . . . More than that, there’s something very special aboutthe selection of the owners: they have selected themselves . . .As I face self-selected top managers across my desk or visitthem in their plants or offices I have become more and moreimpressed with the fact that this self-selection process is farmore important to the success or failure of the company . . .than the monetary aspects of our negotiations.

Reasons for planning are similar to those for devel-oping a business plan (see Chapter 12). Planning helpsan entrepreneur to manage the risks and uncertainties

20Chapter Twenty

Crafting a Personal Entrepreneurial Strategy“If you don’t know where you’re going, any path will take you there.”

The Koran

Results ExpectedUpon completion of this chapter, you will have:1. Looked at the self-assessment process.2. Examined a framework for self-assessment and developed a personal entrepreneurial

strategy.3. Identified data to be collected in the self-assessment process.4. Learned about receiving feedback and setting goals.5. Analyzed the Boston Communications Group, Inc. case study.

643





of the future; helps him or her to work smarter, ratherthan simply harder; keeps him or her in a future-oriented frame of mind; helps him or her to developand update a keener strategy by testing the sensibilityof his or her ideas and approaches with others; helpsmotivate; gives him or her a “results orientation”;helps be effective in managing and coping with whatis by nature a stressful role; and so forth.

Rationalizations and reasons given for not planning,like those mentioned in Chapter 12, are that plans areout of date as soon as they are finished and that no oneknows what tomorrow will bring and, therefore, it isdangerous to commit to uncertainty. Further, the cau-tious, anxious person may find that setting personalgoals creates a further source of tension and pressureand a heightened fear of failure. There is also the pos-sibility that future or yet unknown options, which ac-tually might be more attractive than the one chosen,may become lost or be excluded.

Commitment to a career-oriented goal, particu-larly for an entrepreneur who is young and lacksmuch real-world experience, can be premature. Forthe person who is inclined to be a compulsive and ob-sessive competitor and achiever, goal setting may addgasoline to the fire. And, invariably, some events andenvironmental factors beyond one’s control mayboost or sink the best-laid plans.

Personal plans fail for the same reasons as businessplans, including frustration when the plan appears notto work immediately and problems of changing behav-ior from an activity-oriented routine to one that is goal-oriented. Other problems are developing plans that arebased on admirable missions, such as improving per-formance, rather than goals, and developing plans thatfail to anticipate obstacles, and those that lack progressmilestones, reviews, and so forth.

A Conceptual Scheme for Self-Assessment

Exhibit 20.1 shows one conceptual scheme for think-ing about the self-assessment process called the Jo-hari Window. According to this scheme, there are two

sources of information about the self: the individualand others. According to the Johari Window, thereare three areas in which individuals can learn aboutthemselves.

There are two potential obstacles to self-assess-ment efforts. First, it is hard to obtain feedback; sec-ond, it is hard to receive and benefit from it. Everyonepossesses a personal frame of reference, values, and soforth, which influence first impressions. It is, there-fore, almost impossible for an individual to obtain anunbiased view of himself or herself from someoneelse. Further, in most social situations, people usuallypresent self-images that they want to preserve, pro-tect, and defend, and behavioral norms usually existthat prohibit people from telling a person that he orshe is presenting a face or impression that differs fromwhat the person thinks is being presented. For exam-ple, most people will not point out to a stranger dur-ing a conversation that a piece of spinach is promi-nently dangling from between his or her front teeth.

The first step for an individual in self-assessment isto generate data through observation of his or herthoughts and actions and by getting feedback fromothers for the purposes of (1) becoming aware ofblind spots and (2) reinforcing or changing existingperceptions of both strengths and weaknesses.

Once an individual has generated the necessary data,the next steps in the self-assessment process are tostudy the data generated, develop insights, and then es-tablish apprenticeship goals to gain any learning, expe-rience, and so forth.

Finally, choices can be made in terms of goals andopportunities to be created or seized.

Crafting an Entrepreneurial Strategy

Profiling the Past

One useful way to begin the process of self-assess-ment and planning is for an individual to think abouthis or her entrepreneurial roots (what he or she hasdone, his or her preferences in terms of lifestyle and

EXHIBIT 20.1

Peeling the Onion

Known to Entrepreneur and Team Not Known to Entrepreneur and Team

Known to Prospective Area 1 Known area: Area 2 Blind area: (we do not know what Investors and Stakeholders (what you see is what you get) we do not know, but you do)

Not Known to Prospective Area 3 Hidden area: (unshared—you do Area 4 Unknown area: (no venture is Investors and Stakeholders not know what we do, but the deal does certain or risk free)

not get done until we find out)

Source: Derived from an original concept called the “Johari Window” in D. A. Kolb, I. M. Rubin, and J. M. Mcintyre, Organizational Psychology:An Experimental Approach, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1974).




Chapter 20 Crafting a Personal Entrepreneurial Strategy 645

work style, etc.) and couple this with a look into thefuture and what he or she would like most to be do-ing and how he or she would like to live.

In this regard, everyone has a personal history thathas played and will continue to play a significant rolein influencing his or her values, motivations, atti-tudes, and behaviors. Some of this history may pro-vide useful insight into prior entrepreneurial inclina-tions, as well as into his or her future potential fit withan entrepreneurial role. Unless an entrepreneur isenjoying what he or she is doing for work most of thetime, when in his or her 30s, 40s, or 50s, having agreat deal of money without enjoying the journey willbe a very hollow success.

Profiling the Present

It is useful to profile the present. Possession of cer-tain personal entrepreneurial attitudes and behav-iors (i.e., an “entrepreneurial mind”) have beenlinked to successful careers in entrepreneurship.These attitudes and behaviors deal with such factorsas commitment, determination, and perseverance;the drive to achieve and grow; an orientation towardgoals; the taking of initiative and personal responsi-bility; and so forth.

In addition, various role demands result from thepursuit of opportunities. These role demands are ex-ternal in the sense that they are imposed upon everyentrepreneur by the nature of entrepreneurship. Asdiscussed in Chapter 7, the external business envi-ronment is given, the demands of a higher potentialbusiness in terms of stress and commitment aregiven, and the ethical values and integrity of key ac-tors are given. Required as a result of the demands,pressures, and realities of starting, owning, and oper-ating a substantial business are such factors as ac-commodation to the venture, toleration of stress, andso forth. A realistic appraisal of entrepreneurial atti-tudes and behaviors in light of the requirements ofthe entrepreneurial role is useful as part of the self-assessment.

Also, part of any self-assessment is an assessment ofmanagement competencies and what “chunks” of expe-rience, know-how, and contacts need to be developed.

Getting Constructive Feedback

A Scottish proverb says, “The greatest gift that Godhath given us is to see ourselves as others see us.” Onecommon denominator among successful entrepre-neurs is a desire to know how they are doing andwhere they stand. They have an uncanny knack forasking the right questions about their performance atthe right time. This thirst to know is driven by a keenawareness that such feedback is vital to improvingtheir performance and their odds for success.

Receiving feedback from others can be a most de-manding experience. The following list of guidelinesin receiving feedback can help:

Feedback needs to be solicited, ideally, fromthose who know the individual well (e.g.,someone he or she has worked with or for) andwho can be trusted. The context in which theperson is known needs to be considered. Forexample, a business colleague may be betterable to comment upon an individual’smanagerial skills than a friend. Or a personalfriend may be able to comment on motivationor on the possible effects on the family situation.It is helpful to chat with the person beforeasking him or her to provide any specific writtenimpressions and to indicate the specific areas heor she can best comment upon. One way to dothis is to formulate questions first. For example,the person could be told, “I’ve been askingmyself the following question . . . and I wouldreally like your impressions in that regard.”Specific comments in areas that are particularlyimportant either personally or to the success ofthe venture need to be solicited and moredetail probed if the person giving feedback isnot clear. A good way to check if a statement isbeing understood correctly is to paraphrase thestatement. The person needs to be encouragedto describe and give examples of specificsituations or behaviors that have influenced theimpressions he or she has developed.Feedback is most helpful if it is neither allpositive nor all negative.Feedback needs to be obtained in writing sothat the person can take some time to thinkabout the issues, and so feedback from varioussources can be pulled together.The person asking for feedback needs to behonest and straightforward with himself orherself and with others.Time is too precious and the road to newventure success too treacherous to clutter thisactivity with game playing or hidden agendas.The person receiving feedback needs to avoidbecoming defensive and taking negativecomments personally.It is important to listen carefully to what isbeing said and think about it. Answering,debating, or rationalizing should be avoided.An assessment of whether the person solicitingfeedback has considered all importantinformation and has been realistic in his or herinferences and conclusions needs to be made.Help needs to be requested in identifyingcommon threads or patterns, possible





implications of self-assessment data and certainweaknesses (including alternative inferences orconclusions), and other relevant informationthat is missing.Additional feedback from others needs to besought to verify feedback and to supplementthe data.Reaching final conclusions or decisions needsto be left until later.

Putting It All Together

Exhibit 20.2 shows the relative fit of an entrepreneurwith a venture opportunity, given his or her relevantattitudes and behaviors and relevant general manage-ment skills, experience, know-how, and contacts, andgiven the demands of the venture opportunity. A cleanappraisal is almost impossible. Self-assessment just isnot that simple. The process is cumulative, and whatan entrepreneur does about weaknesses, for example,is far more important than what the particular weak-nesses might be. After all, everyone has weaknesses.

Thinking Ahead

As it is in developing business plans, goal setting is im-portant in personal planning. Few people are effectivegoal setters. Perhaps fewer than 5 percent have evercommitted their goals to writing, and perhaps fewerthan 25 percent of adults even set goals mentally.

Potential forsingles or doubles, but may strike out

Potential for triplesand home runs

No hat and no cattle Big hat, no cattle

Att

ract

iven

ess

of v

entu

re o

ppor

tuni

ty

High

LowEntrepreneur's requisites

(mind-set, know-how, and experience)

High

EXHIBIT 20.2

Fit of the Entrepreneur and the Venture Opportunity

Again, goal setting is a process, a way of dealingwith the world. Effective goal setting demands time,self-discipline, commitment and dedication, and prac-tice. Goals, once set, do not become static targets.

A number of distinct steps are involved in goal set-ting, steps that are repeated over and over as condi-tions change:

Establishment of goals that are specific andconcrete (rather than abstract and out of focus),measurable, related to time (i.e., specific aboutwhat will be accomplished over a certain timeperiod), realistic, and attainable.Establishment of priorities, including theidentification of conflicts and trade-offs and howthese can be resolved.Identification of potential problems andobstacles that could prevent goals from beingattained.Specification of action steps that are to beperformed to accomplish the goal.Indication of how results will be measured.Establishment of milestones for reviewingprogress and tying these to specific dates on acalendar.Identification of risks involved in meeting thegoals.Identification of help and other resources thatmay be needed to obtain goals.Periodic review of progress and revision ofgoals.






1. How will you personally define success in 5, 10,and 25 years? Why?

2. Assume that at age 40–50 years, you have achieveda net worth of $25–$50 million in today’s dollars.So what? Then what?

Chapter Summary1. The principal task for the entrepreneur is to

determine what kind of entrepreneur he or she wantsto become based on his or her attitudes, behaviors,management competencies, experience, and so forth.

2. Self-assessment is the hardest thing forentrepreneurs to do, but if you don’t do it, you willreally get into trouble. If you don’t do it, who will?

Study Questions1. “What is one person’s ham is another person’s

poison.” What does this mean?2. Can you evaluate thoroughly your attraction to

entrepreneurship?

3. Can you evaluate thoroughly the fit between you andthe demands of a particular opportunity?

4. Can you shape a strategy, including an action plan tomake your entrepreneurial aspirations a reality?





Exercise

Personal EntrepreneurialStrategy

The exercise that follows will help you gather data, bothfrom yourself and from others, evaluate the data you havecollected, and craft a personal entrepreneurial strategy. TheQuickLook exercise from Chapter 7 provided an opportu-nity to take a quick inventory of your personal attributes.The personal entrepreneurial strategy exercise takes thisprocess to the next level.

The exercise requires active participation on your part.The estimated time to complete the exercise is 1.5 to 3hours. Those who have completed the exercise—students,practicing entrepreneurs, and others—report that the self-assessment process was worthwhile and it was also de-manding. Issues addressed will require a great deal ofthought, and there are, of course, no wrong answers.

Although this is a self-assessment exercise, it is useful toreceive feedback. Whether you choose to solicit feedback

and how much, if any, of the data you have collected youchoose to share with others is your decision. The exercisewill be of value only to the extent that you are honest andrealistic in your approach.

A complex set of factors clearly goes into makingsomeone a successful entrepreneur. No individual has allthe personal qualities, managerial skills, and the like, in-dicated in the exercise. And, even if an individual didpossess most of these, his or her values, preferences, andsuch may make him or her a very poor risk to succeed asan entrepreneur.

The presence or absence of any single factor does notguarantee success or failure as an entrepreneur. Before pro-ceeding, remember, it is no embarrassment to reach for thestars and fail to reach them. It is a failure not to reach forthe stars.

Name:

Date:

Part I: Profile of the Past

STEP 1Examine Your Personal Preferences.What gives you energy, and why? These are things from either work or leisure, or both, that give you the greatest amount ofpersonal satisfaction, sense of enjoyment, and energy.

Source of Energy Reason





What takes away your energy, and why? These create for you the greatest amount of personal dissatisfaction, anxiety, ordiscontent and take away your energy and motivation.

Source of Energy Reason

Gives Energy Takes Energy

Attributes—Would Energize Attributes—Would Turn Off

Rank (from the most to the least) the items you have listed above:

In 20 to 30 years, how would you like to spend an ideal month? Include in your description your desired lifestyle, work style,income, friends, and so forth, and a comment about what attracts you to, and what repels you about, this ideal existence.

Review the idea generation guide you completed in Chapter 3 and list the common attributes of the 10 businesses youwanted to enter and the 10 businesses you did not:




Which of these attributes would give you energy and which would take it away, and why?


Attribute Give or Take Energy Reason

Complete this sentence: “I would/would not like to start/acquire my own business someday because . . .”

Discuss any patterns, issues, insights, and conclusions that have emerged:





Rank the following in terms of importance to you:

Important ← ⎯⎯⎯⎯ → Irrelevant

Location 5 4 3 2 1Geography (particular area) 5 4 3 2 1Community size and nature 5 4 3 2 1Community involvement 5 4 3 2 1Commuting distance (one way):

20 minutes or less 5 4 3 2 130 minutes or less 5 4 3 2 160 minutes or less 5 4 3 2 1More than 60 minutes 5 4 3 2 1

Lifestyle and Work StyleSize of business:

Less than $1 million sales or under 20 employees 5 4 3 2 1More than $1 million sales or 20 employees 5 4 3 2 1More than $10 million sales and 200 employees 5 4 3 2 1

Rate of real growth:Fast (over 25%/year) 5 4 3 2 1Moderate (10% to 15%/year) 5 4 3 2 1Slow (less than 10%/year) 5 4 3 2 1

Workload (weekly):Over 70 hours 5 4 3 2 155 to 60 hours 5 4 3 2 140 hours or less 5 4 3 2 1

Marriage 5 4 3 2 1Family 5 4 3 2 1Travel away from home:

More than 60% 5 4 3 2 130% to 60% 5 4 3 2 1Less than 30% 5 4 3 2 1None 5 4 3 2 1

Standard of LivingTight belt/later capital gains 5 4 3 2 1Average/limited capital gains 5 4 3 2 1High/no capital gains 5 4 3 2 1Become very rich 5 4 3 2 1

Personal DevelopmentUtilization of skill and education 5 4 3 2 1Opportunity for personal growth 5 4 3 2 1Contribution to society 5 4 3 2 1Positioning for opportunities 5 4 3 2 1Generation of significant contacts, experience, and know-how 5 4 3 2 1

Status and Prestige 5 4 3 2 1Impact on Ecology and Environment 5 4 3 2 1Capital Required

From you 5 4 3 2 1From others 5 4 3 2 1

Other Considerations 5 4 3 2 1





Imagine you had $1,000 with which to buy the items you ranked above. Indicate below how you would allocate themoney. For example, the item that is most important should receive the greatest amount. You may spend nothing on someitems, you may spend equal amounts on some, and so forth. Once you have allocated the $1,000, rank the items in orderof importance, the most important being number 1.

Item Share of $1,000 Rank

LocationLifestyle and work styleStandard of livingPersonal developmentStatus and prestigeEcology and environmentCapital requiredOther considerations

Discuss why you became involved in each of the activities above and what specifically influenced each of your decisions.

Discuss what you learned about yourself, about self-employment, about managing people, and about making money.

STEP 2Examine Your Personal History.List activities (1) that have provided you financial support in the past (e.g., a part-time or full-time job, a paper route), (2) thathave contributed to your well-being (e.g., financing your education or a hobby), and (3) that you have done on your own(e.g., building something).





Discuss why you became involved in each of the employment situations above and what specifically influenced each ofyour decisions.

List and discuss your full-time work experience, including descriptions of specific tasks for which you had responsibility,specific skills you used, the number of people you supervised, whether you were successful, and so forth.

Discuss what you learned about yourself, about employment, about managing people, and about making money.

List and discuss other activities, such as sports, in which you have participated and indicate whether each activity was in-dividual (e.g., chess or tennis) or team (e.g., football).

What lessons and insights emerged, and how will these apply to life as an entrepreneur?




If you have ever started a business of any kind or worked in a small company, list the things you liked most and those youliked least, and why.


If you have ever been fired from or quit either a full-time or part-time job, indicate the job, why you were fired or quit, thecircumstances, and what you have learned and what difference this has made.

How have the people above influenced you? How do you view them and their roles? What have you learned from themabout self-employment? Include a discussion of the things that attract or repel you, the trade-offs they have had to consider,the risks they have faced and rewards they have enjoyed, and entry strategies that have worked for them.

Among those individuals who have influenced you most, do any own and operate their own businesses or engage inde-pendently in a profession (e.g., certified public accountant)?

If you changed jobs or relocated, indicate the job, why the change occurred, the circumstances, and what you havelearned from those experiences.

Like Most Reason Like Least Reason





If you have ever worked for a larger company (over 500 employees or about $50 million to $60 million in sales), list thethings you liked most and those you liked least about your work, and why.

Like Most Reason Like Least Reason

Summarize those factors in your history that you believe are entrepreneurial strengths or weaknesses.

Strengths Weaknesses

Part II: Profile of the Present: Where You Are

STEP 1Examine Your “Entrepreneurial Mind.”Examine your attitudes, behaviors, and know-how. Rank yourself (on a scale of 5 to 1)

Strongest ← ⎯⎯⎯⎯ → Weakest

Commitment and DeterminationDecisiveness 5 4 3 2 1Tenacity 5 4 3 2 1Discipline 5 4 3 2 1Persistence in solving problems 5 4 3 2 1Willingness to sacrifice 5 4 3 2 1Total immersion 5 4 3 2 1

Opportunity ObsessionHaving knowledge of customers’ needs 5 4 3 2 1Being market driven 5 4 3 2 1Obsession with value creation and enhancement 5 4 3 2 1

Tolerance of Risk, Ambiguity, and UncertaintyCalculated risk-taker 5 4 3 2 1Risk minimizer 5 4 3 2 1Risk sharerTolerance of uncertainty and lack of structure 5 4 3 2 1Tolerance of stress and conflict 5 4 3 2 1Ability to resolve problems and integrate solutions 5 4 3 2 1





Creativity, Self-Reliance, and Ability to AdaptNonconventional, open-minded, lateral thinker 5 4 3 2 1Restlessness with status quo 5 4 3 2 1Ability to adapt 5 4 3 2 1Lack of fear of failure 5 4 3 2 1Ability to conceptualize and to “sweat details” (helicopter mind) 5 4 3 2 1

Motivation to ExcelGoal and results orientation 5 4 3 2 1Drive to achieve and grow (self-imposed) 5 4 3 2 1Low need for status and power 5 4 3 2 1Ability to be interpersonally supporting (versus competitive) 5 4 3 2 1Awareness of weaknesses (and strengths) 5 4 3 2 1Having perspective and sense of humor 5 4 3 2 1

LeadershipBeing self-starter 5 4 3 2 1Having internal locus of control 5 4 3 2 1Having integrity and reliability 5 4 3 2 1Having patience 5 4 3 2 1Being team builder and hero maker 5 4 3 2 1

Summarize your entrepreneurial strengths.

Summarize your entrepreneurial weaknesses.

STEP 2Examine Entrepreneurial Role Requirements.Rank where you fit in the following roles.


Accommodation to VentureExtent to which career and venture are No. 1 priority 5 4 3 2 1

StressThe cost of accommodation 5 4 3 2 1

ValuesExtent to which conventional values are held 5 4 3 2 1

Ethics and Integrity 5 4 3 2 1






Summarize your strengths and weaknesses.

STEP 3:Examine Your Management Competencies.Rank your skills and competencies below.


MarketingMarket research and evaluation 5 4 3 2 1Marketing planning 5 4 3 2 1Product pricing 5 4 3 2 1Sales management 5 4 3 2 1Direct mail/catalog selling 5 4 3 2 1Telemarketing 5 4 3 2 1Customer service 5 4 3 2 1Distribution management 5 4 3 2 1Product management 5 4 3 2 1New product planning 5 4 3 2 1

Operations/ProductionManufacturing management 5 4 3 2 1Inventory control 5 4 3 2 1Cost analysis and control 5 4 3 2 1Quality control 5 4 3 2 1Production scheduling and flow 5 4 3 2 1Purchasing 5 4 3 2 1Job evaluation 5 4 3 2 1

FinanceAccounting 5 4 3 2 1Capital budgeting 5 4 3 2 1Cash flow management 5 4 3 2 1Credit and collection management 5 4 3 2 1Managing relations with financial sources 5 4 3 2 1Short-term financing 5 4 3 2 1Public and private offerings 5 4 3 2 1

AdministrationProblem solving 5 4 3 2 1Communications 5 4 3 2 1Planning 5 4 3 2 1Decision making 5 4 3 2 1Project management 5 4 3 2 1Negotiating 5 4 3 2 1Personnel administration 5 4 3 2 1Management information systems 5 4 3 2 1Computer/IT/www 5 4 3 2 1

Interpersonal/TeamLeadership/vision/influence 5 4 3 2 1Helping and coaching 5 4 3 2 1






MarketingFeedback 5 4 3 2 1Conflict management 5 4 3 2 1Teamwork and people management 5 4 3 2 1

LawCorporations 5 4 3 2 1Contracts 5 4 3 2 1Taxes 5 4 3 2 1Securities 5 4 3 2 1Patents and proprietary rights 5 4 3 2 1Real estate law 5 4 3 2 1Bankruptcy 5 4 3 2 1

Unique Skills 5 4 3 2 1

STEP 4Based on an Analysis of the Information Given in Steps 1–3, Indicate the Items You Would Add to a“Do” List.





Part III: Getting Constructive FeedbackPart III is an organized way for you to gather constructive feedback. (If you choose not to get constructive feedback at thistime, proceed to Part IV.)

STEP 1(Optional) Give a Copy of Your Answers to Parts I and II to the Person Designated to Evaluate Your Re-sponses. Ask Him or Her to Answer the Following:Have you been honest, objective, hard-nosed, and complete in evaluating your skills?

Are there any strengths and weaknesses you have inventoried incorrectly?

Are there other events or past actions that might affect this analysis and that have not been addressed?

STEP 2Solicit Feedback.Give one copy of the feedback form (begins on the next page) to each person who has been asked to evaluate yourresponses.





Feedback FormFeedback for:

Prepared by:

STEP 1Please Check the Appropriate Column Next to the Statements About the Entrepreneurial Attributes, andAdd Any Additional Comments You May Have:

Strong Adequate Weak No Comment

Commitment and DeterminationDecisiveness S A W NCTenacity S A W NCDiscipline S A W NCPersistence in solving problems S A W NCWillingness to sacrifice S A W NCTotal immersion S A W NC

Opportunity ObsessionHaving knowledge of customer’s needs S A W NCBeing market driven S A W NCObsession with value creation and enhancement S A W NC

Tolerance of Risk, Ambiguity, and UncertaintyCalculated risk-taker S A W NCRisk minimizer S A W NCRisk sharer S A W NCTolerance of uncertainty and lack of structure S A W NCTolerance of stress and conflict S A W NCAbility to resolve problems and integrate solutions S A W NC

Creativity, Self-Reliance, and Ability to AdaptNonconventional, open-minded, lateral thinker S A W NCRestlessness with status quo S A W NCAbility to adapt S A W NCLack of fear of failure S A W NCAbility to conceptualize and to “sweat details” (helicopter mind) S A W NC

Motivation to ExcelGoal and results orientation S A W NCDrive to achieve and grow (self-imposed standards) S A W NCLow need for status and power S A W NCAbility to be interpersonally supportive (versus competitive) S A W NCAwareness of weaknesses (and strengths) S A W NCHaving perspective and sense of humor S A W NC

LeadershipBeing self-starter S A W NCHaving internal locus of control S A W NCHaving integrity and reliability S A W NCHaving patience S A W NCBeing team builder and hero maker S A W NC

Please make any comments that you can on such matters as my energy, health, and emotional stability; my creativity andinnovativeness; my intelligence; my capacity to inspire; my values; and so forth.





STEP 2Please Check the Appropriate Column Next to the Statements About Entrepreneurial Role Requirementsto Indicate My Fit and Add Any Additional Comments You May Have.


Accommodation to venture S A W NCStress (cost of accommodation) S A W NCValues (conventional economic and professional values of free S A W NCenterprise system)Ethics and integrity S A W NCAdditional Comments:

STEP 3Please Check the Appropriate Column Next to the Statements About Management Competencies, andAdd Any Additional Comments You May Have.


MarketingMarket research and evaluation S A W NCMarketing planning S A W NCProduct pricing S A W NCSales management S A W NCDirect mail/catalog selling S A W NCTelemarketing S A W NCCustomer service S A W NCDistribution management S A W NCProduct management S A W NCNew product planning S A W NC

Operations/ProductionManufacturing management S A W NCInventory control S A W NCCost analysis and control S A W NCQuality control S A W NCProduction scheduling and flow S A W NCPurchasing S A W NCJob evaluation S A W NC

FinanceAccounting S A W NCCapital budgeting S A W NCCash flow management S A W NCCredit and collection management S A W NCManaging relations with financial sources S A W NCShort-term financing S A W NCPublic and private offerings S A W NC

AdministrationProblem solving S A W NCCommunications S A W NCPlanning S A W NCDecision making S A W NCProject management S A W NCNegotiating S A W NCPersonnel administration S A W NCManagement information systems S A W NCComputer/IT/www S A W NC






Interpersonal/TeamLeadership/vision/influence S A W NCHelping and coaching S A W NCFeedback S A W NCConflict management S A W NCTeamwork and people management S A W NC

LawCorporations S A W NCContracts S A W NCTaxes S A W NCSecurities S A W NCPatents and proprietary rights S A W NCReal estate law S A W NCBankruptcy S A W NC

Unique Skills S A W NC

Additional Comments:

STEP 4Please Evaluate My Strengths and Weaknesses.In what area or areas do you see my greatest potential or existing strengths in terms of the venture opportunity we have dis-cussed, and why?

Area of Strength Reason

Area Weakness Reason

In what area or areas do you see my greatest potential or existing weaknesses in terms of the venture opportunity we havediscussed, and why?





Please make any other suggestions that would be helpful for me to consider (e.g., comments about what you see that I liketo do, my lifestyle, work style, patterns evident in my skills inventory, the implications of my particular constellation of man-agement strengths and weaknesses and background, the time implications of an apprenticeship).

If you know my partners and the venture opportunity, what is your evaluation of their fit with me and the fit among them?

Given the venture opportunity, what you know of my partners, and your evaluation of my weaknesses, should I considerany additional members for my management team? If so, what should be their strengths and relevant experience?





Part IV: Putting It All Together

STEP 1Reflect on Your Previous Responses and the Feedback You Have Solicited or Have Received Informally(From Class Discussion or From Discussions With Friends, Parents, Etc.).

STEP 2Assess Your Entrepreneurial Strategy.

What have you concluded at this point about entrepreneurship and you?

How do the requirements of entrepreneurship—especially the sacrifices, total immersion, heavy workload, and long-termcommitment—fit with your own aims, values, and motivations?

What specific conflicts do you anticipate between your aims and values, and the demands of entrepreneurship?

How would you compare your entrepreneurial mind, your fit with entrepreneurial role demands, your management com-petencies, and so forth, with those of other people you know who have pursued or are pursuing an entrepreneurial career?





Think ahead 5 to 10 years or more, and assume that you would want to launch or acquire a higher potential venture.What “chunks” of experience and know-how do you need to accumulate?

What are the implications of this assessment of your entrepreneurial strategy in terms of whether you should proceed withyour current venture opportunity?

What is it about the specific opportunity you want to pursue that will provide you with sustained energy and motivation?How do you know this?

At this time, given your major entrepreneurial strengths and weaknesses and your specific venture opportunity, are thereother “chunks” of experience and know-how you need to acquire or attract to your team? (Be specific!)

What other issues or questions have been raised for you at this point that you would like answered?





Part V: Thinking AheadPart V considers the crafting of your personal entrepreneurial strategy. Remember, goals should be specific and concrete,measurable, and, except where indicated below, realistic and attainable.

STEP 1List, in Three Minutes, Your Goals to be Accomplished by the Time You Are 70.

STEP 2List, in Three Minutes, Your Goals to be Accomplished Over the Next Seven Years. (If You Are an Un-dergraduate, Use the Next Four Years.)

STEP 3List, in Three Minutes, the Goals You Would Like to Accomplish if You Have Exactly One Year From To-day to Live. Assume You Would Enjoy Good Health in the Interim but Would Not be Able to Acquire AnyMore Life Insurance or Borrow an Additional Large Sum of Money for a “Final Fling.” Assume Furtherthat You Could Spend that Last Year of Your Life Doing Whatever You Want to Do.

STEP 4List, in Six Minutes, Your Real Goals and the Goals You Would Like to Accomplish Over Your Lifetime.





STEP 5Discuss the List From Step 4 With Another Person and then Refine and Clarify Your Goal Statements.

STEP 6Rank Your Goals According to Priority.

STEP 7Concentrate on the Top Three Goals and Make a List of Problems, Obstacles, Inconsistencies, and soForth, That You Will Encounter in Trying to Reach Each of These Goals.

STEP 8Decide and State How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and soForth.

STEP 9For Your Top Three Goals, Write Down All the Tasks or Action Steps You Need to Take to Help You At-tain Each Goal and Indicate How Results Will be Measured.It is helpful to organize the goals in order of priority.

Goal Task/Action Step Measurement Rank





STEP 10Rank Tasks/Action Steps in Terms of Priority.To identify high-priority items, it is helpful to make a copy of your list and cross off any activities or task that cannot be com-pleted, or at least begun, in the next seven days, and then identify the single most important goal, the next most important,and so forth.

STEP 11Establish Dates and Durations (and, if Possible, a Place) for Tasks/Action Steps to Begin.Organize tasks/action steps according to priority. If possible, the date should be during the next seven days.

STEP 12Make a List of Problems, Obstacles, Inconsistencies, and so Forth.

STEP 13Decide How You Will Eliminate Any Important Problems, Obstacles, Inconsistencies, and so Forth, andAdjust the List in step 12.

STEP 14Identify Risks Involved and Resources and Other Help Needed.

Goal Task/Action Step Measurement Rank

Documents

New Venture Creation Chap 16-19